II I

Chapter -6

EURO-ISSUES

6.1 In t roduct ion

Depository Receipt (DR) is a negotiable instrument evidencing

a fixed number of equity shares of the issuing company generally

denominated in US dollars irrespective of the currency in which the

u n d e r l y i n g shares are d e n o m i n a t e d . ' Depos i to ry Receipts are

commonly used by those companies who want to sell their securities

in international market and expand their shareholding abroad. These

securities are listed and traded in international stock exchanges. These

can be either American Depository Receipt (ADR) or Global Deposi­

tory Receipt (GDR). ADRs are issued in case the funds are raised

through retail market in United States. In case of GDR issue the

invitation to participate in the issue can not be extended to retail US

inves tors but unde r Rule 144A of securi t ies Act, 1993 of USA,

Qualified Institutional Buyers (QIBs) can participate in such a deal.

QIBs are the inst i tut ional investors who have at least US $ 100

Million under their portfolio to invest. As such there are certain

restrictions for the issuing company in case they want to the tap QIBs

in US market such as no research report of the syndicate members

can be circulated in the USA and hence the syndicate members should

marke t the issue in the USA only with the pre l iminary offering

circular.

While DRs are issued by the depository in the international

VII

market, the underlying shares are issued in the domestic market by

the issuing company . These shares issued by the company are

custodised in the home market with a local bank called custodian.

Even though the emergence of DRs as a means to raise equity

capital from international market dates back to 1927, it is only after

1980 when the world stock market began to climb and investors

became more venturesome, the GDR market got the boost. However,

in India the first GDR issue was launched only in 1992 by Reliance

Industries Limited since prior to this the Indian regulations did not

permit issuance of GDR by an Indian company.

6.2 GDR issues by Indian Companies

After four d e c a d e s of r e g u l a t e d economic pol ic ies , the

Government of India started a major economic reforms program in

1991 aimed at integration of Indian economy with global economies.

The Government took various steps in this directions like reduction

in customs duty, delicencing of imports, delicencing of large number

of indust r ies , removal of adminis tered pricing and dis t r ibut ion

regula t ions etc. In add i t ion the Government in t roduced certain

financial reforms to help foreign investment in India including

* Streamlining the security regulatory regime including

abolition of CCI, free pricing of equity issues and setting

up of SEBI as a regulatory agency to watch the Indian

capital market.

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* Promotion of foreign investment in India both direct and

portfolio.

* Allowing Indian companies to tap international capital

market to raise funds through issuance of equity under

GDR/FCCB route.

* Disinvestment of Government equity in select public sector

u n d e r t a k i n g s (PSUs) paving the way for raising of

equity funds by these companies from the market.

In 1992, the Government of India permitted Indian companies

to raise funds through issuance of equity capital in international

market though GDR/FCCB. -The Indian companies found this route

very attractive to raise funds. Today more and more companies are

trying this avenue to raise funds.

As the Government disinvested a part of the equity holding in

se l ec t PSUs, t he se c o m p a n i e s b e c a m e p u b l i c w i th p r iva t e

shareholding. The shares of these PSUs got listed on Indian stock

exchanges^ thereby creating a market for these shares which made

possible for these PSUs to raise funds through issuance of shares to

public at large. This also helped Government of India to successfully

implement its policy of withdrawing budgetary support for PSUs and

to make them operate more commercially. This policy forced PSUs to

operate in more competitive and open environment and to strive to

be self sustaining . Taking advantage of changed scenario, the PSUs

are approach ing domest ic and internat ional capital markets for

raising equity funds.

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Raising funds through issue of ADRs has become popular both

with the companies and the investors due to :

6.3 Benefit to the issuing Company

* Internat ional capital market is very large and liquid

which can absorb issues of larger size.

* It will broaden the shareholder-base and enhance investor

quality.

* It normally offers better comparative share value.

* The cost of rais ing equi ty funds from internat ional

marke t is generally lower than the cost of domestic

issue.

* It helps to enhance the image of the company and its

products internationally.

* A GDR issue normally increases research coverage on

the company, thereby increasing availability of analytical

information to the investors which creates buying interest

in the shares of the company and improves the valuation.

* Shares issued under the GDR program generally do not

carry voting right and hence help the management to raise

equit}' capital without losing control over the company.

* The companies are able to rise funds in foreign currency

and thus reduce exchange risk if the funds are required

to finance imports.

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6.4 Benefits to the Investors .

* GDRs are allowed to be issued only by the companies

with proven track record of profitable operations.

* GDRs are l is ted and t r a d e d in i n t e rna t i ona l stock

exchanges and hence are free from delivery and settlement

problems.

* GDRs are generally denominated in US Dollars and hence

reduces the foreign exchange risk.

* Dividend and capital gains on investment in GDRs carry

concessional tax rates.

* GDR market for most of the scrips is more liquid and

hence facilitates faster entry and exit.

* GDR route helps investors to overcome the local regulations

which may prohibi t purchase and holding of shares

abroad.

* Investors in GDRs are not required to comply with a large

number of complex formalities and regulations normally

required for investment through domestic stock exchanges.

6.5 The Background

Many large companies in India require foreign exchange for

import ing vital capital goods. In the early Eighties, India's rating in

the international credit market stood high, so Indian companies with

strong finances and which could offer acceptable security could get

foreign currency loans from international banks for meeting their

foreign exchange r equ i r emen t s . The acceptable securi ty was a

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guarantee given by a bank or a financial institution in India. In the

ear ly N i n e t i e s , the fore ign exchange r e se rves of the count ry

dwindled . The Indian economy was also weak. On account of these,

India 's credit rating fell below " investment grade".^ At that time

Indian companies were finding it difficult to obtain loans from

international Banks. Hence, many Indian companies had to approach

the Export and Import Bank of India and other financial institutions

like The Industr ia l Credi t and Investment Corporat ion of India

Limited who had foreign lines of credit from International Finance

corporation or other International agencies, for foreign currency loans.

By middle 1991, the liberalization of the Indian economy was set in

motion. There was an earnest at tempt to integrate India with the

global market . The emerging transparency and decontrols attracted

the attention of many foreign investors. The foreign equity investors

apprec ia ted the l iberal policies of the Indian Government and

identified huge stakes in the emerging Indian capital market.

While present ing the Budget in February 1992, the Finance

Minister announced Governments decision to allow the Foreign

Institutional Investors to invest in the capital market in India and to

allow Indian companies with good track record to float their stocks

in foreign markets with a view to augmenting the foreign exchange

reserves of the country."*

6.6 What is an Euro Issue?

The term Euro issue denotes that the issue is made abroad

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through instruments denominated in foreign currency and the securities

issued are listed on any Overseas Stock Exchange. Euro issue is a

method of mobilizing resources required by a company in foreign

exchange. Most of the Indian companies get their issues listed on the

Luxembourg stock exchange. Subscription can come for Euro issues

from any part of the World except India. The Euro issue equity or

bonds can be traded on the Stock exchange abroad where it is listed

or on the OTC Exchange in London.^

6.7 What is A Global Depository Receipt ?

Companies making Euro issues can issue two types of instruments

namely Global Depository Receipts (GDRs) or Foreign Currency

Convertible Bonds (FCCBs).

A GDR is an instrument in the form of a depository receipt or

a Negotiable Certificate created by the overseas depository bank

outside India and issued to non-resident investors against the issue

of equity shares or foreign currency convertible bonds of the issuing

company outside India. A GDR usually represents one or more shares

or convertible bonds of the issuing company. A holder of a GDR is

given an option to convert it into number of shares /bonds that it

represents after 45 days from the date of allotment. GDR is an

instrument denominated in Dollar or in some other freely convert­

ible foreign currency . The shares or bonds which GDR is entitled to

get on conversion are denominated in Indian rupees. Once GDR is

converted, the shares issued on conversion are listed on an\' one or

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more of the Indian Stock Exchanges. Till conversion the GDR does

not carry any voting right. There is no lock-in-period for GDRs. GDRs

are issued by the Indian companies to an intermediary abroad called

Overseas Depository Bank. The equity shares /bonds representing the

GDRs are registered in the name of the overseas depository bank and

the relative share Cert i f icates/Bond Certificates are delivered to

another intermediary called the Domestic Custodian Bank who acts

as the agent of the overseas depository bank in India.

6.8 What is Foreign Currency Convertible Bond ?

The Foreign Currency Convertible Bond (FCCB) is almost like

the convertible debentures issued in India. The bond has a fixed

interest or coupon rate and is convertible into certain number of shares

at a pre-fixed price. The bonds are listed and traded on one or more

stock exchanges abroad. Till conversion the company has to pay

interest on FCCBs in Dollars (or in some others foreign currency )

and if the conversion option is not exercised, the redemption also

has to be done in foreign currency. The bonds are generallv unsecured.

Hence, there is a view that the size of the bond issue should be within

the limits prescribed for acceptance of deposits in the companies

(Acceptance of Deposits ) Rules 1975.''

In both GDRs and convertible bonds, there could be further sweet­

eners like warrants attached. Warrants are prospective ownership claims

that are sold or issued by a company. Each warrant will give the

warrant holder a right (but not an obligation) to applv for a specified

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number of shares of the company at a pre-fixed price, during a specified

period.

6.9 Why Indian Companies Prefer Euro Issues ?

Indian companies can collect a large volume of funds in US

Dollars or Pound Sterling or in any other foreign currency of their

choice through Euro issues. It is not possible to collect large volume

of funds in the domestic capital market. Till conversion GDRs do not

carry any voting rights. There is no exchange risk for the issuing

company as shares under ly ing GDRs are denominated in Indian

rupees al though the company receives funds in foreign currency.

A listing of GDRs on an international stock exchange could provide

the companies substantial l iquidity and also make the company's

securities more attractive to more buyers. Euro issue can raise the

profile of the company.

6.10 Why Foreign Investors Prefer Euro Issues ?

Foreign investors who are generally institutional investors are

interested mainly in the return on investment in the form of capital

appreciation and dividend income. They are not interested in voting

rights. Return on investment in shares in Indian companies is much

higher compared to returns available on many stock exchanges in

the world. Moreover, they need not register themselves with SEBI.

They need not pay tax on capital gains made by them on the sale of

GDRs abroad. The}- need not appoint a custodian in India to look

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after their dealing in securities.^ They need not get Reserve bank's

permission for investing on GDRs.

6.11 Guidelines for Euro Issues

The Department of Economic Affairs announced on 12.11.1993

a scheme called " Issue of Foreign Currency Convertible Bonds and

ordinary shares through depository receipt mechanism scheme, 1993".

Subsequently, the depar tment of Economic Affairs framed internal

guidelines for Euro issues on 20.4.1993. Further guidelines have been

formulated by the Government on 11.5.1994.

6.12 Eligibility for issuing GDR

The company which proposes to issue GDR should have a

consistent track record of good performance ( financial or otherwise)

for a minimum period of 3 years.

6.13 Issue structure

The Global Depository Receipt may be issued for one or more

underlying shares or bonds held with the domestic custodian bank.

The company should decide in consultation with the Lead Managers

the following aspects about the issue:-

1) Public or private placement; 2) Number of GDRs to be

issued; 3) Issue price and 4) Conversion price, coupon rate and the

pricing of the conversion options of the foreign currency convertible

bonds.

VI.10

The company desirous of making Euro issue has to make an

application to the Department of Economic Affairs furnishing the

terms of the issue, the issue size, price range and other particulars

s ta ted in the issue of Foreign Currency Conver t ib le Bond and

ordinary shares through Depository Receipt Mechanism Scheme, 1993

and obtain the in-principle approval. The in-principle approval is

valid only for 3 months from the date of its issue. Company should

finalize the issue structure and again approach the Department of

Economic Affairs within 3 months from the date of in-principle

approval and get final approval for the issue. Euro issues are treated

by Government as direct foreign investments. Accordingly, a company

contained in Annexure-III of the New Industrial Policy of 1991 whose

direct foreign investment after the proposed Euro issue is likely to

exceed 51 percent or which is implementing projects not predominantly

contained in Annexure-III should obtain clearance for investment

from the Foreign Investment Promotion Board before final approval

for the Euro issue is given by the Finance Ministry.

6.14 Ceiling on Euro Issue

The shares and foreign currency convert ible bonds issued

against GDRs are treated as direct foreign investment in the issuing

company. "The aggregate of the foreign inves tment made either

di rect ly or indirect ly th rough GDR issue should not exceed 51

percent of the issued and subscribed capital of the issuing company.

The term direct foreign investment includes investment by foreign

VI.11

collaborators but excludes investment through offshore funds or by

foreign institutional investors.

6.15 Listing of GDRs

GDRs issued under the scheme may be listed on any of the

overseas stock Exchanges or over-the-counter exchanges or through

book entry transfer system prevalent abroad. 'GDRs may be purchased

and sold by any non-resident as defined in FEMA.

6.16 Transfer and Redemption of GDRs

1) A non-resident holder of Global Depository Receipts may

t r a n s f e r t hose r ece ip t s or may ask the ove r seas

depository bank to redeem those receipts.^" In the case

of redemption overseas depository bank shall request the

domes t i c cus tod ian bank to get the co r r e spond ing

u n d e r l y i n g s h a r e s r e l e a s e d in f avour of the

non-resident, for beings sold directly on behalf of the

non-resident or being transferred in the books of account

of the issuing company in the name of the non-resident.

2) In case of redemption of the global depository receipts

into under lying shares a request for the same will be

t r ansmi t t ed by the overseas deposi tory bank to the

domestic custodian bank in India with a copy of the same

being sent to the issuing company for information and

record.

VI.12

3) On redempt ion , the cost of acquisi t ion of the shares

underlying the Global Depository shall be reckoned as

the cost on the date on which the overseas depository

bank advises the Domestic Custodian Bank for redemption.

The price of the ordinary shares of the issuing company

prevailing in the Bombay Stock Exchange or the National

stock Exchange on the date of the advice of redemption

shall be taken as the cost of acquisition of the underlying

ordinary shares.

4) For the purposes of conversion of Foreign Currency

Convertible Bonds, the cost of acquisition in the hands

of the non-resident investors would be the conversion

price determined on the basis of the price of the shares

at the Bombay stock Exchange or the National Stock

Exchanges, on the date of conversion of Foreign Currency

Convertible Bonds into shares.

6.17 Taxation

Interest on the bonds (until conversion) is subject to deduction

of tax at source at 10 percent. Tax on dividend on converted portion

of the bond is subject to a deduction of tax at source at 10 percent.

Transfer of GDRs made outside India by one non-resident to another

non-resident shall not give rise to capital gains liable to tax in India.

Dividend on GDRS will be taxed at the rate of 10 per cent and

tax on such dividend will be deducted at source." After the GDRs

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are redeemed, dividend on the underlying shares will be taxed at 10

percent and tax on such dividend will be deducted at source. Long

term capital gains arising out of the transfer of shares (after redemption

of GDRs) will be taxed at 10 percent and it is liable to be withheld at

source.

The holding of GDRs by non-residents and the holding of

under ly ing sores by the overseas deposi tory bank in a fiduciary

capacity and the transfer of GDRs between non-resident investors,

are exempt from wealth tax and gift tax.

6.18 Procedure for GDR Issue

Euro issue management needs an extremely well-planned time

bound activity. The issuing company has to comply with various

enactments, rules, regulations, stock exchange requirements etc. It

also calls for a team work and the team comprises all the intermediaries

involved in the issue. It is the collective involvement of all which

gets the desired results. A compan}' which desires to make a Euro

issue has to study its requirements of foreign exchange component

in its project or diversification or modernization plans. It has to check

up the following aspects:-

1) Whether the size of its issue is more than the economic

size of a Euro issue. According to the internal guidelines

finalized by the Department of Economic Affairs, on

20.4.1993 the size of the issue should not be less than 20

million dollars and more than 100 million dollars. ' ' In

VI.14

the case of power sector and shipping, the limit is higher

at 500 million dollars. The funds to be raised will be

res t r i c t ed to 50 per cent of the pos t - i s sue marke t

capitalization. Companies can make only one Euro issue

in a financial year. There should be a gap of 12 months

between two Euro issues. Group companies cannot come

out with more than 2 issues in a financial year. The

expression group companies ' is to be interpreted on the

basis of the definition of" same group " as provided in

section 372(11) of the companies Act, 1956. "*

2) The company has to first find out whether the existing

authorized capital is sufficient for the purpose of Euro

issue. If not the company has to take steps to get its

authorized capital increased. If the company has taken

term loans from financial ins t i tut ions/banks or issued

debentures , check up the loan agreements /debenture

trust deed and find out whether permission of the lenders/

t rustees for deben ture holders is to be obtained for

m a k i n g the p r o p o s e d i s sue . Most of the financial

institutions stipulate a condition in the loan agreement/

trust deed for debentures that the borrower company

should take their permission for increasing its capital.

If the loan agreement /debenture trust deed contains a

condi t ion to this effect, make an appl icat ion to the

lenders and obtain prior permission for making the

proposed issue.

VI.15

3) Also check up with the foreign stock exchange where the

company proses to list its GDRs through the listing agent

which is usually a bank approved by the overseas stock

exchange, whether the issue satisfies its listing requirements.

Most companies list the GDRs in Luxembourg or Dublin

Stock E x c h a n g e s . If the s ize of the i s sue is big,

companies may consider listing the GDRs in London or

New York stock Exchanges.^''

6.19 Other points to be Noted

1) Funds raised by Euro issues can be utilized only for the

following purposes:-

a) Financing capital goods imports;

b) Financing domestic purchase/installation of plant equipment

and buildings;

c) Prepayment or scheduled repayment of earlier external

borrowing;

d) A margin of 15 per cent of the total proceeds of an issue

for other general corporate restructuring uses;

e) Making investments abroad where these have been ap

proved by competent authorities.

2) The funds should be utilized within 12 months from the date

of issue.

3) Companies should submit quarterly statement of utilization

of funds duly certified by Auditors to the Department of

Economic Affairs.

VI.16

4) Government does not encourage financial companies to float

Euro issues. '"

The check-list of activities for GDR issue (backed by shares is

briefly indicated below:-

1. Arrange to convene a board meeting to decide on the

Euro issue, pass a suitable resolution for making the

euro issue, and for approving the draft notice of the

Ex t rao rd ina ry general meet ing at which the special

resolution for making Euro issue will be considered. The

exact amount to be raised by the Euro issue need not be

stated in the resolution to be passed by the shareholders

of the company, but an upper ceiling may be specified

to give the company some flexibility. The explanatory

statement as required under section 173 of the companies

Act, 1956 to be appended to the notice of extraordinary

general meeting should be approved by the Board.

2. Issue the notice for ex t raord inary general meeting,

together with an explanatory statement giving 21 clear

days notice to the share holders.

3. Hold the general meeting of shareholders, pass a special

resolution under section 81(1A) of the companies Act

approving the proposed Euro Issue and file the same with

Registrar of companies in Form No. 23, within 30 days

from the date of the meeting.

4. Make an applicat ion to the Depar tment of Economic

VI.17

Affairs (Ministry of Finance) seeking permission for the

Euro issue, giving the details of the quantum and terms

of the issue, the price range, the track record of the

company and the objects of the issue. The application

should contain the additional information prescribed in

the guidelines for the GDR issues by the Department of

Economic Affairs in the Minis t ry of Finance in the

no t i f i ca t ion m e n t i o n e d above . The D e p a r t m e n t of

Economic Affairs will consider the application and will

give an in-principle approval, if it is satisfied with the

proposal . The in-principle approval will be valid for

3 months from the date of issue of approval.

5. On getting in-principle approval from the Department

of Economic Affairs. Selected merchant bankers (Lead

Managers) and under writers for the issue. Lead managers

should have exposure to Euro issues made by Indian

companies.^^ Hence, reputed merchant bankers in foreign

countries are given the assignment. Discuss the issue

proposal with the Lead Managers and give him the

Balance shee t and all o ther p a r t i c u l a r s abou t the

company. He will study the proposal and suggest how

to market the issue He will prepare due diligence report

which will es tabl i sh that the c o m p a n y ' s aud i t and

compliance system are in order. Lead Managers charge

a fee of 3 per cent of the issue as fees for managing or

underwri t ing a Euro issue.

VI.18

6. Discuss with Lead Managers and select the overseas

depository bank for the issue (Depository Banks charge

5 per cent of the issue price for rendering their services.)

7. Select in consultation with the overseas depository bank,

the custodian bank in India.

8. Select in consultation with the lead managers the solicitors

and bankers abroad for the issue. Select the listing Agent

(normally a bank in the place where the Overseas Stock

Exchanges function is appointed as Listing Agent. The

l is t ing agent should have the approval of the stock

exchanges concerned to act as such) Make the listing

application to the overseas stock exchanges in advance

for listing the GDRs. Make an application to the National

Association of Securities Dealers (NASDAQ) in London

for inclusion of the companies GDRs for dealing in their

PORTAL system.

9. The p r i c e b a n d for the GDRs s h o u l d be dec ided

in consul tat ion with the Lead Managers, taking into

consideration the following:-

a) future earnings for the next 3 years;

b) current price of the shares on stock exchanges;

c) fundamental analysis of the company and the industry.

10. After finalizing the issue structure and after appointing

the intermediaries for the issue, make another application

to the Depar tment of Economic Affairs, and get the

in-pr inciple approval converted into final approval .

VI.19

While giving the final approva l , the d e p a r t m e n t of

economic affairs prescribes a 45-day " cooling period"

dur ing which the market makers, who are usually the

Managers to the Euro issue, are obliged to give two way

quotations for the GDRs to stabilize.'^ The final approval

is valid only for 3 months. So the issue should be made

within 3 months from the date of issue of final approval.

11. Ar range for drafting of the offering circular by the

solicitors and merchant bankers keeping in view the

international disclosure s tandards . Before drafting the

offering circular which is equivalent to prospectus, make

necessary changes in the audited accounts to conform to

the international accounting standards by regrouping the

items in the profit and loss account and balance sheet

and if necessary get the revised accounts audited by the

audi tors of the company.

Stated in the offering circular, is the following:-

(a) The quantum of over-subscription in percentages terms

which the company proposes to retain.

(b) Standsti l l per iod- i.e. the period dur ing which the

company will not make further issue of shares, with a

view to protecting the value of shares represented by GDRs.

(c) The "cooling period" that is a period of 45 days during

which market makers will give two-way quotations for

the GDRs to stabilize.

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(d) Procedure for transfer of GDRs.

(e) A statement that any foreign institutional investor can

apply for GDRs representing not more than 5 percent of

the companies issued and subscribed capital.

(f) GDR holders have no voting rights.

(g) Whether depository can exercise voting rights and if so

how it can exercise the same.

(h )Procedure for r e d e m p t i o n / c o n v e r s i o n of GDR into

shares,

(i) Overseas stock exchange in which the GDRs will be

listed,

(j) The rate at which income-tax at source will be deducted

from dividend ( the rate of tax deduction is 10 percent at

present)

(k) Owners of the GDRs will be entitled to receive from the

depository an amount equal to the net amount (after

Indian withholding tax and other expenses of depository

if any^ of the rupee d iv idend per share which the

depository receives from the company, converted into

US Dollars.

(1) Details of government of India's approvals,

(m) Share price data

(n) Shareholding pattern (i.e. composition of shareholders)

(o) Dividend paid in the last 5 years,

(p) Brief history of the company and details of business

activities.

VI.21

(q) Use of funds collected by the GDR issue.

(r) Directors and management.

(s) General information about the business in which the company

is engaged.

(t) The law which governs the Depository agreement.

(u) How Indian securities market operates.

(v) Where and how documents can be inspected by prospective

investors.

(w) A summary of information contained in the offering circular.

(x) Any notice to be given by the company to the holders of

GDR should be published in a daily newspaper of general

circulation in the city where the overseas stock exchange

in which GDRs are listed, is located. It would be advisable to

state in the offering circular, the name of the newspaper

in which notices to GDR holders will be a published.

(y) Reformatted Financial statements and auditor 's report

and annotated financial results, if any.

(z) Table of contents (index) for easy reference.

By leaving a blank space in the offering circular for

enter ing the issue price of the shares and GDRs, this

offering circular is called the" red herring" prospectus.

12) Arrange to keep ready all the original and copies of

mater ia l contracts and documents ment ioned in the

offering circular for filling the same with the Registrar

of companies.

13) Get the offering circular approved by the board. File

VI.22

the offering circular with the Registrar of companies and

the stock exchange where GDRs will be listed for the

purpose of record. Deliver a copy of the offering circular to

the Securi t ies and Exchange Board of India for the

purpose of record.

14) Arrange for printing the offering circular and application

forms with the printers abroad selected by the Lead

managers so that distribution of application forms and

offering circular will be easy.

15) Settle the draft of the depository agreement between the

issuing company and the overseas depository bank in

accordance with international law in consultation with

the solicitors and execute the same.

16) Finalize the draft of the custodian agreement between

the overseas depository bank and the domestic custodian

bank in consultation with the solicitors and lead managers

and arrange to execute the same.

17)Finalize the draft of the subscription agreement between

in the inventors and the overseas depository bank in

consultation with solicitors and Lead Managers.

18) Decide the marketing strategy to be adopted for the

issue in consultation with the Lead Managers and the

underwri ters .

19) Make an application to reserve bank in form ISD seeking

their approval for making Euro issue. Application has

to be submit ted to central office of Reserve Bank of

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India at Bombay- Obtain Reserve Bank's in-principle

approval before making the issue.

20) Make an application to the Reserve Bank for release of

foreign exchange for meeting 1) the travel requirement

of the company's executive to visit different countries

for ho ld ing the roadshows ; 2) r oa ds how expenses ;

3) listing fee payable to overseas stock exchange; 4) For

payment of brokerage, underwri t ing commission etc.;

and 5) expenses for printing prospectus and application

forms and for d i s t r ibu t ing the same; and get RBI's

approval for the foreign exchange requirements After

get t ing Reserve Bank's approval and getting foreign

exchange release by the bank, the company's executives

can visit different countries for holding roads shows.

Make another application to the Reserve Bank seeking

their permission for opening a bank account abroad with

the bankers to the issue and get their permission before

the issue opens.

21) Arrange to hold roadshows in different countries 4 to 5

weeks before the issue opens to ascertain the response

of foreign/non-resident investors. Roadshows are held

in different countr ies to build demand for the GDR

issue. In the roadshows , the Chai rman or the Chief

Executive of the company will brief the activities and

highlight the various aspects of the Euro issue. A video

presentation will be made. These conferences are generallv

V124

attended by institutional investors, pension funds and

big n o n - r e s i d e n t inves to r s w h o ask more po in ted

questions. The chairman or the Chief Executive of the

c o m p a n y has to answer the q u e r i e s ra i sed in the

roadshows. Normally, roadshows are held in big hotels.

Roadshows may go on for 15 days to 30 days before the

launch of the issue.

22)Settle ,well in advance, the format of GDR to be issued

by overseas depository bank in consultation with the

solicitors and lead managers.

23)Decide on the timing of the issue and issue price after

assessing the response to the roadshows and keeping in

view the prices of the securities on the Bombay stock

exchange for 10 days prior to the date of issue. Pricing is

to be done very carefully. Issue should be attractively

and not aggressively priced. Euro market investors scoff

at premia, so premium should be fixed properly.

24) Make an app l i ca t ion to the s ta te g o v e r n m e n t for

p a y m e n t of conso l ida t ed s t a m p duty on the share

certificates proposed to issued and get the necessary order.

25) Make an application to the stock exchange abroad (where

listing is proposed )for listing the GDRs.

26) Announce the openings of the issue and the price of

GDRs. Actual issue price is determined just a day prior

the launch of the issue on the basis of the feedback

received by the compan}' from its underwriters. The price

VI.25

of a GDR is generally lower of the average of the prices

for the last week and that of the last day, on the Bombay

Stock Exchange, prior to the date of launch. Sometimes

the price is fixed at an appropriate discount. Companies

generally fix the issue opening and closing time according

to New York time. Timing the issue is very important,

see that no other euro issue from India simultaneously

opens.

27) Ascertain the response of the issue from the underwriters/

bankers to the issue. If the issue is oversubscr ibed,

decide the quantum of over subscription to be retained.

Announce the closure of the issue in consultation with

the lead manager.

28) Make an application to Reserve Bank in form ISD and

request Reserve Bank to convert its earlier in-principle

approval into final approval for making the allotment

of shares and for issuing GDRs.

29) Hold a board meeting for approving the draft depository

agreement with overseas deposi tory bank. After the

board approves the same, execute the agreement with

the depository bank.

30) Hold a board meeting, allotment committee meeting

(if the board has formed an allotment committee) and

allot shares in favour of the overseas depository bank as

provided in the depository agreement.

31) Memorandum and articles of association of the company,

VI.26

b y e - l a w s of the d e p o s i t o r y , copy of d e p o s i t o r y

agreement/ a legal notice relating to the issuance of the

GDRs, are to be deposited prior to listing, with the chief

registrar of the District court of Luxembourg (if listing

is to be made on Luxembourg stock exchange. All these

documents should also be deposited with listing agent

who should make them available for the inspection of

investors. Get the GDRs listed on the overseas stock

exchange mentioned in the offering circular.

32) Arrange for transfer of the subscr ipt ion in foreign

exchange collected by the bankers to the issue to the

companies bank account in India . Gove rnmen t has

stipulated that companies making Euro issues should

remit the entire foreign currency raised to India within

2 weeks from the date of closure of the issue unless the

government has permitted the company to retain the

same abroad for specified purposes , while granting

approval for making the euro issue.

33) Arrange to execute the custodian agreement between the

overseas depository bank and the custodian bank in India.

34) After the Board Meeting is over, the return of allotment

in Form No.2 with the ROC and issue the share certificates

to the custodian bank in India by complying with the

companies (issue of share certificates) rules, 1960.

35) Ask the custodian bank in India to intimate the overseas

depository bank that the company has lodged with it the

VI.27

share certificates underlying the GDRs.

36)See that the global depository receipts are issued by the

overseas depository bank to the underwri ters who will

place the same with the investors.

37)Pay the fees to the lead m a n a g e r s / c o - m a n a g e r s /

advisers to the issue, pay commission to the underwriters,

pay fees to custodian bank, overseas depository bank,

listing agent etc. pay brokerage to the brokers who have

procured subscription for the issue etc.

38) Send quarterly reports about utilization of funds duly

certified by Auditors to the Depar tment of Company

Affairs, Ministry of Finance. It has to be seen that the

funds are utilized within 12 months from the date of issue.

39)If the issue is over subscribed and if any application is

rejected or al lotment is made for lesser number than

applied for, make refund of the application money by

cheque or pay order or demand draft.

40) Send copies of company's annual reports and half yearly

results to the listing agent so that he can make them available

to the investors for their inspection.

41) Dividend for the shares pertaining to GDRs is to be paid

in rupees to the overseas depository bank after deduction

of 10 percent income-tax at source. The depository has

to convert the dividend received from the companv into

Dollars and pay it to the holders of GDRs.

VI.28

6.20 Euro Issues : Statuary Procedural Requirements

The procedural requirements for issue of GDRs and FCCBs

briefly are as under.

(a) Authorization by the Board of Directors.

(b) Authorization by the shareholders in General Meeting.

(c) Government approvals:

i) Ministry of Finance

ii) Department of Company Affairs,

iii) Reserve Bank of India.

(d) Consent of Stock Exchange.

6.21 Authorization by the Board of Directors

The issuer company should pass a board resolution for taking

a decision to float GDR/FCCB in the Global Market.

The board should approve the notice calling a General Meeting of

the shareholders for the purpose.

It is advisable to consti tute a Committees of Directors and

confer necessary manda t e to it for approv ing var ious m a t t e r s /

d o c u m e n t s connec t ed w i t h the Euro i s sue once the Board of

Directors of the issuer company has decided to float GDRs/FCCBs in

the Global Market . The fol lowing m a t t e r s / d o c u m e n t s will be

approved by the committee, namely:-

(a) Offering memorandum.

VI.29

(b) Fixation of the issue price.

(c) Subscription agreement.

(d) Deposit agreement.

(e) Agreement with company's process agent.

(f) Allotment of shares in favour of depository.

(g) Opening of Bank account outside India and operation

of the said account.

(h) Approval of green-shoe option.

(i) Making/f i l ing necessary application with the securities

and Exchange C o m m i s s i o n USA. and / o r mak ing

applications to Luxembourg stock exchange, or other

exchanges.

(j) To sign and execute any deed , document , wri t ing,

confirmation, undertaking, indemnity in favour of any

party including managers, legal advisers, accountants or

others who may be related to the issue.

Note :- The company should notify the stock exchange the date

of board meeting at which the proposal will be considered as also

inform the stock exchange the decision of the board.

6,22 Author iza t ion by the Shareholders

The shareholders must approve the proposal by passing a

special Resolution as per section 81 of the Companies Act 1956.

Approvals as per sections 94, 16 and 31 of the Companies Act, 1956,

should also be taken from the shareholders, if required.

VI.30

6,23 Government Approvals

Approval of Ministry of Finance, Department of Economic Affairs

1) Government approval is inter alia sought for issue size,

terms of issue as to issue price, payment of interest, conversion,

redempt ion , payment of fees and expenses of the issue.

Appointment of Lead Manager, Depository, Indian Custodian

and w^here listing of securities will be made including

t rading provisions and settlement provisions.

2) Approval to the effect that rule 19(2) (b) of the rules under

Securities Contracts (Regulation) Act, 1956, is not applicable.

3) Direction to the effect that a copy of the offering Memorandum

is to be filed with (a) SEBI, (b) Regional Stock Exchange and

c) Registrar of Companies for record.

4) Approval to the effect whether the issue proceeds should

be kept outside the country or remitted to India.

5) Direction to the effect that the company shall submit a state­

ment within 2 weeks of the closing of the issue on the fol­

lowing namely:

a) Full particulars of issue price;

b) Listing arrangements completed;

c) Total amount realized; and

d) Other relevant details regarding launching and initial

trading of GDR/FCCBs.

Note:- 1) An application should be made by the company when an

Euro issue is conceived for ob ta in ing " in -pr inc ip le"

VL31

approva l from the Ministry of Finance, Depar tment of

Economic Affairs.

2) Approval of the Central Government is valid for a period

of 6 months.

6.24 Approvals/Clarification of Department of Company Affairs

Approva l / clarification of the department of company affairs

is sought inter alia for:-

1. Permission under section 81(3)(b) for issue of Euro convertible

bonds.

2 Approval to the effect that provisions relating to issue of

prospectus are not applicable.

3. Clarification as to non-applicability of provisions of section 108

of the Companies Act, 1956 for GDR/ ECBs issued.

6.25 Grey Areas

* Applicability of section 58 A of the Companies Act, 1956,

for issues of ECBs which are unsecured.

* Compliance of provisions of section 187C for beneficial

ownership.

6.26 Approval/Clarification from Reserve Bank of India

Approval from Reserve Bank of India is sought inter alia for:-

1. Approval under section 19(1) (b) of FEMA to make an

international offering to foreign investors through the GDRs

mechanism.

VI.32

2. Approval /Genera l permission for the following:

i) To acquire GDRs by foreign investors under section

29(1) (b) of FEMA.

ii)To redeem the bonds (FCCB) after a specified period,

iii) To pay interest on due dates.

iv) To convert the FCCBs into either GDRs or ordinary

shares of the company after a specified period,

v) To export certificates to the nonres iden t holders

under section 19 (1) (a) of FEMA

vi) To appoint Lead Managers to the issue,

vii) To appoin t deposi tor ies and cus todians for the

purpose of GDR.

viii) To pay issue related expenses.

ix) To remit and pay for filing, listing, agency and other

fees on on-going basis in respect of any international

stock exchange.

x) To maintain a foreign Register of Bond holders / GDR

holders if required.

xi) To open an account abroad to receive subscription

moneys in foreign currency and repatriate funds through

banking channels to India.

xii) To pay any foreign tax in the nature of sales or value

added tax in respect of services provided reimbursement

of out of pocket expenses,

xiii) To pay / r emi t dividends on shares,

xiv) To issue securities by way of Rights/Bonus that may accrue.

VI.33

xv) To appoin t Trustees Agents and registrars to the

issue and payment of fees to them for services rendered.

Note:- Validity period of the permission is for a period of six

months from the date of Government of India 's letter.

6.27 Consent of the Stock Exchange

Approval of stock exchange is sought to the effect:-

a) That the equity shares issued upon conversion of GDRs

would be listed and admitted to dealings on the Exchange.

b) That the usual pre-listing requirements relating to purely

Indian /domest ic issues are not applicable.

6.28 Appointment of Intermediaries

The company generally holds preliminary discussion with the

global merchant bankers before taking decision for floating the GDRs.

A formal appointment of the global merchant bankers is made only

after approval of the government for issue of GDRs.

The merchant Bankers select the following intermediaries ,

namely :-

* Overseas underwriters to market the issue by organizing

road shows with the issuer.

* Lead managers to the issue.

* Depositories to issue GDRs to the underwri ters who

arrange to place them with the ultimate investors

VI.34

* Custodians to hold the shares of the Indian companies

physically on behalf of the depository.

* Bankers etc.

6.29 Due Diligence Requirements

A team consisting of legal, technical and financial key persons

from the Lead Manager 's side visit the company. During the visit:-

a) Financial Team goes through the detailed balanced sheet

of the company, and its subsidiary, its financial arrangement

with the group, investment pattern and also analyse the

future prospects of the company.

b) Technical Team goes through the project, its technology,

life of technology etc.

c) Legal Team goes through the minutes of the company, various

agreements entered into by the company with regard to

marketing, purchase tie-up and also employment strategy,

personnel policy and any other litigation which may have

an impact on the profitability or on the profit of the company.

During the diligent activities, they also collect various documents

which help and assist them for preparing the Prospectus.

Senior Directors/ Executives of the issuer will be interviewed

by the Lead Managers / Legal Advisors at the due diligence meeting

to ensure the accuracy of the descript ion of the compan\ ' in the

Prospectus.

VI.35

Issuer's Auditors also will be interviewed with regard to the

financial statements appearing in the Prospectus.

6.30 Disclosure & Accounting Requirements

Indian companies should get their balance sheets verified or

overhauled by internationally recognized firms of Chartered Accountants

for complying with the listing norms on Overseas Stock Exchanges

especially European exchanges.

This exercise starts well ahead of time before launching the

Euro issue. It is necessary, for, there is a wide difference between the

Indian Generally Accepted Accounting Principles (I . GAAP) and U.S.

Generally Accepted Accounting Principles (U.S. GAAP). Companies

issuing GDRs have to disclose these differences in the Offering

Memorandum. Hence, it is all the more necessary to know about this.

Disc losure and Account ing requ i rements in a Euro issue

prospectus can be categorized as under

a) Accounting requirements;

b) GAAP differences; and

c) Other information

Accounting Requirements

*Audited Financial statements for 3-5 years

*Reformatting is optional

* Statement of GAAP Differences

VI.36

* Reconciliation of net profit & net assets

GAAP Differences

Summary of significant differences between I GAAP, U.K. and

U.S. GAAP is given below:-

I. GAAP

1. Revaluation of Fixed Assets is permitted.

2. Excess depreciation is allowed.

3. Consolidation for subsidiaries is not required.

4. Cash flow statement is not required.

5. Taxation is provided on estimated tax liability.

6. Goodwill is capitalized and no requirement to amortize.

7. Information regarding Earning Per Share (EPS) is not

required to be disclosed.

8. Share issues expenses can be deferred.

9. Capitalization of interest on Fixed Assets is required

while assets are under construction.

10 Distinction is not made between Fixed assets and

Current asset investments. All investment are carried at

cost; but market value is disclosed.

11 Extraordinary items are disclosed as additional

information without adjustment for tax effect thereof.

12 Capitalization of lease is not required.

13 Depreciation is on straight line method (SLM) or written

down value (WDV) as adopted.

\a37

14 Gains/losses from Foreign Exchange currency transactions

relating to assets and liabilities are adjusted in the

respective accounts other gains losses are taken to P&L

account.

15 Research & Development (R & D) expenditure is charged

to P & L account except equipment, machinery, which

are capitalized and depreciated.

16 There is no requirement to classify the current portion

of long-term debts as a current liability.

U.K. GAAP

1. Permitted

2. Not allowed.

3. Consolidation is required.

4. Required.

5. Deferred taxation on timing differences reversible

6. Required to capitalize and amortize or adjust against

reserves.

7. EPS data before Extraordinary items is disclosed.

8. To be written off against share premium

9. Permitted while Fixed Assets are under construction

10. Fixed asset investments are carried at cost current

asset investments are carried at the lower of cost and

net realization value-investments in associated companies

are accounted for under the Equity method.

11.Extraordinary items are separately disclosed with in

\138

come-tax effect thereon.

12. Financial leases are to be capitalized

13. Depreciation is on the straight line method with reference to

useful economic life of the asset.

14 Gains/losses from Foreign currency trisections are taken

to P & L account and / o r shareholders equity.

15.R & D is expensed as incurred.

16. Current portion of long term debt is shown as current

liability

U. S. GAAP

1. Not permitted.

2. Not allowed

3. Consolidation is required.

4. Required

5. Deferred taxation on temporary timing differences

6. Goodwill is capitalized and amortized over a period not

exceeding 40 years

7 EPS data after Extraordinary items is disclosed

8. Same as U K GAAP

9. Required as per GAAP

10. Equity method is generally used if the investing company

influence the financial policies of the investee company.

Other investments are valued at lower of cost or market

value.

11.Extraordinary items are reported.

\a.39

12. Same as U. K. GAAP

13. Same as U. K. GAAP

14. Same as U. K. GAAP

15 R & D is expensed as incurred ( except for certain

software R & D )

16. As per U. K. GAAP.

6.31 Other Information

Financial

a) Capitalization Table

b) Select financial information and other data

c) Investment considerations

d) Use of proceeds

e) Market price information

f) Dividends

g) Capital s tructure and description of shares

h) Description of security issued

i) Taxation

j) Stamp duty

Non- Financial

a) Company background.

b) Management analysis of operations

c) Business details

d) The Indian economic environment

e) Recent economic & regulatory policies.

VI.40

f) Indian securities Market

g) Transfer restrictions

h) Legal matters

i) Professional experts.

6.32 Listing on Overseas Stock Exchanges

Mostly Euro bond issues are offered publicly and listed either

on the international stock exchange in London or the Luxembourg

stock exchange. The main purpose of a listing is to satisfy the investment

restrictions to which many institutional investors, such as pension

fund and insurance companies are subjected. These restrictions

prohibit the investors from acquiring securities they are listed on a

recognized stock exchange.

Almost all the Euro issues made by the Indian companies are

on pr iva te placement basis in the U.S. under rule 144a wherein

registration under the Securities Act is not required or is exempt.

Listing requirements at Luxembourg are simpler, less expensive,

not requiring major disclosure and recasting of accounts.

6.33 Depository Receipts (DRs) are Offered for Subscription as

Under

1. Unsponsored — issued by one or more depositories in

response to market demand. Today this is obsolete.

2. Sponso red .— This is p r o m i n e n t Today t hanks to

VI.41

flexibility to list on a national exchange in the U.S. and the

ability to raise capital.

i) Private placement (144A) DRs

A company can access the U.S. and other markets through a

private placement of sponsored DRs. In this a, company can raise

capital by placing DRs with large institutional investors and avoid

registering with the SEC.

ii) Sponsored Level 1- DRs

This is the simplest method for companies to access the U S

and non U.S. capital markets Level DRs trade on the OTC market

and as a result the company does not have to comply with U.S.

Generally Accepted Accounting Principles (U.S. GAAP) or full Securities

and Exchange commission SEC disclosure. Under this, companies

enjoy the benefits of a publicly traded security without changing its

current reporting process.

iii) Sponsored Level II and III DRs.

Compan ies tha t wish to ei ther list their securi t ies on an

exchange in the US or raise capital, use sponsored Level-II or III DRs

respectively Each level requires different SEC registration and reporting

plus adherence to US GAAP. The companies must also meet the

l i s t i ng r e q u i r e m e n t s of the N a t i o n a l E x c h a n g e or NASDAQ

whichever it chooses.

VI.42

The Securities and Exchange Commission (SEC) adopted rule

144A and an amendment to rule 144A on 19th April, 1990.

Under rule 144A the purchaser may offer and resale those

securities to any Qualified Institutional Buyer (QIB), if;

a) The securities are not the same class as securities of

the issuer quoted in NASDAQ or listed on a U. S Stock

exchange.

b) The buyer is advised that the seller is relying on rule

144A; and

c) Unless the issuer is a reporting company or is exempt

from Exchange Act registration under rule 12 g 3-2 (b)

the buyer, upon request, has the right to receive at or

prior to the time of sale, specified financial statements

of the issuer and information as to its business.

In view of the foregoing, it is permissible for a foreign private

issuer to sell its shares through an underwri ter into the U.S provided

the shares are eligible for Rule 144A treatment and U.S market is

limited to QIBs. To accomplish this the underwri ter would purchase

the securi t ies from the issuer in a t ransact ion exempt from the

registration requirements of the Securities Act and relying upon rule

144 A, resale those securities to QIBs in the U.S.

The National Association of Securities Deal (NASDAQ) has

established an electronic trading system similar to NASDAQ called

PORTAL within which. Rule 144A eligible securities approved by

VI.43

the NASDAQ for deposit may be traded by QIBs.

The following table sets out various t rading provisions for

GDRs/ADRs under various levels of offering namely:-

6.34 Obligation of Issuer to Luxembourg Stock Exchange

Luxembourg stock exchange should be informed /furnished

mat ters /de ta i l s which are given to the Regional Stock Exchange in

India unde r the l is t ing ag reemen t such as in t imat ion for book

closure. Board meetings for considering Right i ssue/Bonus issue,

dividend and taking on record unaudited half-yearly/annual results

etc. of the company. Similarly the decision of the Board of Directors

on the aforesaid counts should be intimated to the Luxembourg Sock

Exchange . In other w o r d s the issuer company should in t imate

Luxembourg stock exchange all matters which have a bearing on the

Equity shares of the company. The issuer company is also obligated

to publish appropr ia te notice in a newspaper of general material

developments in respect of rights or obligation arising under the

GDRs.

6.35 Certain Points

1. Will GDR/FCCBs be excluded for calculation of maximum

limit of foreign holding under FEMA?

2. Will approval/confirmation of RBI be required to all benefits

and exchange of shares of the company in case of merger,

compromise, reconstruction etc., as applicable to Indian

\T.44

shareholder?

3. Approval to pay Bond holders upon conversion of Bonds,

payment in US $ in lieu of issuing fractional shares.

4. Are there restrictions on NRIs purchasing the bonds in

the offering or the secondary market and that all the ap

provals stated above apply on the same terms to NRIs?

5. What approvals are required for any holder of any shares

to renounce or sell any shares —Rights, Securities,

Bonus shares or other distributions in India over one of

the Indian stock exchanges or otherwise to convert the

proceeds thereof into foreign currency at prevailing market

rates and to repatriate the entire proceeds in favour of

the holder?

6.36 Clarification Thereof

1. Foreign investment by way of GDRs/FCCBs has to be

taken into account for determining FEMA status of the

Indian company. NRI holdings plus GDR/FCCBs issues

cannot go beyond 51 percent of the paid up capital of

the company. If foreign investment exceeds 51 percent

the Indian company will have to take specific permission from

government of India.

2. RBI confirmation is required for this. But this can be

obtained from RBI for this purpose.

3. Permission is required. Specific permission to be

obtained from RBI for this purpose.

VI.45

4. There are no restrictions on NRIs purchasing the bonds

in offering or in the secondary market.

5. For sale of renunciation right in favour of residents for

cons idera t ion/no consideration, permission of RBI in

each case is necessary under FEMA. Similarly, transfer

of securities from a person resident outside India to a

person resident in India require confirmation from RBI

under section 19(5)of FEMA by submitt ing Form TS-1.

The renunciation proceeds, if any, will be allowed to be

repatriated subject to payment of tax as applicable/stamp

duty etc.

6.37 Time Table for GDRs Offering (Covers Only Important Activities)

Time —Frame

1. Appoint Lead Manager, Legal (days)

Counsels (Issuers, Lead managers,

underwriters),Depository Bank

and Custodian Bank. X(-)90

2. Furnish to the Lead manager with

all necessary materials to prepare

the documents . X(-)60

3. Hold discussions with Legal

Advisors /Audi to r s for drafting

of various agreements and offering

circular. X(-)60

4. Hold Due diligence meeting with

VI.46

the Lead Managers X(-)40

5. Obtain Board approval, share

holders approval and other

approvals from government,

RBI etc. X(-)40

6. Appoint other intermediaries in

consultation with the lead manager. X(-)20

7. Prepare and finalize draft offering

Memorandum and circulate to

all parties. X(-)10

8. Finalize all documents including

depository agreement, subscription

agreement, trust deed, paying

& agency agreement. Applications

for listing etc. X(-)10

9. Update all comments received

inthe Offering Memorandum

and other agreements and give

for printing X(-)7

10. Commence road show X(-)7

11. Launch the issue X

12. Price the issue X(+)3

13. Sign the document X(+)4

14. Close the issue. X(+)14

VI.47

6.38 Glossary

ADRs : American Depository Receipts are securities issued by

a depository bank, denominated in U.S. dollars for trading in U.S.

Public, private and Non U.S. markets, which represent securities

deposited with a local custodian bank outside the US.

GDRs :- Global Depository Receipts are identical to ADRs.

GDRs may be used in U.S. private and overseas public offerings when

the term "Global" is preferred.

Exempt Foreign Issuer :- Foreign private issuer that is exempt from

reporting under the Exchange Act of 1934 pursuant to rule 12g 3-2 (b)

Fungible Securities :- Securities of the same class or characteristic

and that, for t rading purposes, cannot be dist inguished one from

another. Privately placed restricted securities may not be fungible

with publicly traded unrestricted securities of the same class.

Level DRs :- Depository Receipts (ADRs or GDRs) which trade

in the U.S. public over- the- counter market pursuant to rule 12g 3-2

(b) exemption from registration under the Securities Exchange Act of

1934. All DRs (ADRs or GDRs ) which t rade in the U.S. public

markets are referred to as "unrestricted". Level I Depository Receipts

can also be traded outside the U.S.

6.39 Non-reporting Non-exempt Foreign issuer.

A foreign private issuer that files a Form 20F or maintains the

VI.48

exemption pursuant to rule 12g 3-2(b).

Portal :- P r i v a t e offer ings , r e sa l e and t r a d i n g t h r o u g h

automated linkages.

Private placement:- Non-publ ic offerings of unregis tered

securities to eligible U.S. investors in reliance on section 4(2) exemption

under the Securities Act of 1933. All ADRs which are privately placed

are referred to as "restricted" ADRs.

QIB:-Qualif ied Ins t i tu t ional Buyers are large inst i tut ions

dealers or banks that own significant specified amounts of securities

($ 100 million for institutions and banks $ 10 million for dealers) and,

in the case of a bank, meet an additional qualification of a net worth

of at least $25 million.

Reporting company:- A company that repor t s unde r the

Exchange Act of 1934 on form 20-F in non-U.S. or on Form lOK in U.S.

Rule 144A:- SEC rule allowing resales of privately placed

securities among qualified institutional buyers(QIBs).

Rule 144A el ig ib le securities:— Any non-fungible debt on

equity security i,e any security which is not of the same class as

security listed on a US securities exchange of quoted on NASDAQ.

Conver t ib le securi t ies including those which convert into

fungible secur i t ies p rov id ing at issuance they are subject to a

VI.49

conversion premium of at least 10 percent.

Warrants including those for fungible securities providing they

have a life of at least three years and an exercise premium off at least

10 percent.

SEC :- Securities and Exchange Commission, a US governmental

agency established in 1934 to regulate US securities markets.

Unrestricted securities:- securities that have no resale restrictions.

6.40 Some Broad Issues - Observat ions & Conclusions

At the entrance to Jardine Fleming's India headquarters at south

M u m b a i ' s A m a r c h a n d Mans ion , w h e r e the resea rcher had an

occasion to make a visit personally, hangs a framed copy of the

January 1994 announcement of the $ 100 million GDR (global depository

receipts) offering of India's second largest shipping company. Great

Eastern Shipping. Jardine lead managed the issue and even sold it at

a premium of 3.8 percent on the domestic share price. It was hailed

as a big success then. But in the three years since GE shippings share

price has declined steadily and so has the value of the GDR. What

was sold at $15.9 a GDR, is now available for $5. An original investor would

have thus lost as much as 67 per cent of his investment in less than

three years . In contrast the Bomba}' Stock Exchange Sensex lost just

17 percent of its value in the same period.

VI.50

A Closer Look

Table 6.1 A few

Company

ITC

M and M

Hindalco (1st)

Oriental Hotels

MTNL

Ranbaxy Labs

ICICI

BSES Ltd

Hindalco (2nd)

SBI

E.l.Hotels

Dr.Reddy's

good ones

Date of GDR Issue

13-Oct-93

3O-N0V-93

22-Jul-93

14-Dec-94

3-Dec-97

29-Jun-94

2-Aug-96

4-Mar-96

8-Jul-94

3-Ocl-96

7-Oc-t-94

I8-J11I-94

- Indian

Size of GDR Issue

69

75

72

30

419

100

230

125

100

370

40

48

GDRs

GDR Issue price

7.65

4.46

10.73

12.75

11.99

19.38

11.5

14.4

16

14.15

9.3

11.16

at a premium

Current GDR Price at premium to GDR issue price in %

187.58

73.77

72.36

41.18

29.33

23.84

19.57

18.06

15.63

13.07

10.22

0.81

But investors in GE shipping are by most counts better off. It is

I n d i a ' s be s t - run s h i p p i n g c o m p a n y and prof i t s are g rowing .

So sometime in the future^ the share price will possibly start moving

up once again. But others won ' t be that lucky. Investors have,

according to conservative estimates, lost more than Rs. 10,000 crore

investing in Indian GDRS over the last five years. In the frenzy that

followed the opening up the economy in 1992^ Indian companies

raised as much as Rs 25,000 crore through GDRs and nearly Rs 5,000

crore through Euro convertibles. This made up for 31 percent of all

capita] raised through depository receipt offerings by Asian countries in

VI.51

the five years starting January 1992. In comparison tiger economies

like South Korea could manage only 21 percent, Taiwan 15 percent,

Japan 5 percent and China 9 percent. In 1994, the big year for Indian

GDRs, for example, the country was responsible for as many as 38 of

the 69 deposi tory receipt offerings from Asia, and accounted for

$ 2.9 billion of the $6.9 billion that was raised A big achievement for

a country that was virtually shut off from foreign investment till then.

But for the inventors who rushed to buy these GDRs it has been

a virtual disaster. Of the 63 Indian companies that have issued GDRS

in the last five years, 48 are quoting at a discount to their issue price.

Even worse, 39 of the GDRs are currently trading at a discount of

over 50 percent and a dozen of them in excess of 80 percent. According to

est imates, the GDR holders of these companies have lost nearly

60 percent of their original investment so far. Of course, there are

many who would argue that this is nothing new considering that

company promoters and merchant bankers have taken ordinary

Indian shareholders for a bigger ride over the years and that their

losses would be several t imes higher. But what makes the GDR

exper ience par t icular ly egregious is that the GDR investors are

sophisticated fund managers , who are helped along in his or her

efforts by highly-paid, supposedly highly-qualified and definitely

reputed investment bankers and research analysts.

What makes the picture particularly bleak is that these GDRs

are quoting at big discounts at a time when the BSE Sensex has

actually moved up in the same per iod. In the four-year period

VI.52

between December 1993 to December 1997, when most GDRs were

issued, the sensex moved up by 10 percent. Though, if one were to

take December 1994 as the base, the sensex has moved down but only

by 11 percent. It was a case of overblown optimism. People were

expec t ing too much to h a p p e n in 1993 and 1994. Some of the

companies should not have been brought into the GDR market at the

price that they were sold.

The GDR issue process is fundamentally biased against the

interest of investors. Investment bankers are selected on their ability

to ra ise capi ta l at the m a x i m u m poss ib le p r ice at the cost of

investors.

Fund managers are shy to publicly admit that they have lost

huge amounts by punt ing on Indian GDRs.

A Closer Look

Table 6.2 How

Bank

JP Morgan

Lehman

Merrill Lynch

CSFB

Goldman Sachs

SBC Warhurg

Morgan Stanley

BZVV

HSBC

investm

Amount collected

420

945

750

1700

600

700

225

732

560

ent banks fared w ith In

GDRs manag above

3

5

13

13

5

5

3

4

6

ed Q uoting at premiun

25% be

2

2

3

3

1

1

0

0

0

low 25%

Quo

dian GDRs

ting at Quoting at discount

1

2

8

8

2

3

3

2

6

discount

0

1

2

2

2

1

0

2

0

VI.53

The only people who made money are the investment banks

who brought the GDRs in the market. Most of them had big positions

in the GDRs themselves and then sold off the holdings in the first

few weeks of trading. The funds managers who bought the shares in

the secondary market were left holding lemons because after a few

weeks l iquidi ty just d i sappeared from the market . It has been a

disappoint ing experience. There were a few reasonably priced GDRs

but most of them were bad, some were too small to be credible and

some of them were clearly questionable. And to add to the investors

problem of having lost a substantial part of their investment is the

problem of finding a buyer for their stock in the secondary GDR

markets of London and Luxembourg.

Despite the fact that the GDR market is run by foreign braking

houses, it is the most illiquid and opaque market in which investors

are being taken for a r ide , (even) the more l iquid GDRs have

bid-offer spreads of 10 percent and some like Tata Electric have

spreads of 25 percent. The only option left for the fund managers is

to wait till the GDRs convert into their underlying shares and then

sell them in the domestic Indian market and recoup whatever they

can. Some of the investors are setting off their losses by selling those

GDRs which are quoting at a premium and others are simply writing

off their losses.

6.41 Overb lown Opt imism

The reasons for this disastrous performance of the GDRs are

VI.54

not hard to find. Many Indian corporates egged on by naive research

analysts and greedy foreign investment bankers tapped the international

markets with overpriced GDR Issues and used that money to buy

real estate and enter into bought-deals. In the three years immediately

following the then pr ime minis ter Naras imha Rao's decision to

unshackle the economy in 1991,there was unprecedented enthusiasm to

invest in India. India was suddenly in fashion. Many of the fund

managers and investors in Europe and America were not really

bothered about the quality of the company they were investing in or

the price they paid. Anything sold. Come what may, you have to be

in India, was the general at t i tude then.

A group of European investors called and said that they wanted

$ 5 million to be invested in companies known by their acronym (and

not by their full name) because they had heard that the best companies in

India were known only by their acronym .(Business India, Feb.23-March 8).

The India craze was fed in a large measure by the zeal of

international investment bankers, who saw the country as a great new

destination. Barred by prevailing laws from doing business in the

domestic market, these bankers saw GDRs as a big opportunity. The

depository receipts were offered as the better alternative to investing

directly in the Indian stock market with its antiquated settlement

problems. And then there was the hype created about the potential

of the country and its vibrant companies. But many of these banks

did not even have an office in India. The bankers and their analysts

VI.55

flew into the country spent a few days wi th the company and

prepared research reports which seldom had a negative tone. The

bankers were despera te to get a toe- hold and were more than

will ing to do the clients ' b idding in prepar ing research reports.

Analysts were forced into changing figures and forecasts to present

a rosy picture of the company which more often than not was false.

To get a mandate, the investment bankers promised company

p romote rs p r emiums that somet imes could go as high as 50-75

percent above the prevailing market price. Often in collusion with

issuing companies and local brokers, the prices were rigged up to

help place the shares at very high prices. In the case of most companies, the

shares moved up higher than the corresponding movement in the BSE

index in the run-up to the GDR issue. In fact, the average abnormal

returns on GDR scrip in that time frame was 18.9 percent over the

market. In the case of Jain irrigation, for ex?mple, the share price

more than doubled between September 1993 and February 1994, when

it made a $ 30 million GDR offering at $11.1 a GDR. It is now (Quoting

at a discount of 93 percent. Another example is Garden Silk, a textile

company, whose share price nearly tripled between September 1993

and March 1994 when it successfully raised $45 million through a

GDR issue It is now quoting at a 93 percent discount.

Back in 1993 and 1994, no doubt, there was price manipulation

before a GDR issue. It was a situation where too much money was

chasing too few issues and investors did not mind paying a premium

VI.56

for these issues. But since then investors have wisened up. The

issues that came later have mostly gone at a discount.

In most cases, particularly those of reputed companies there is

clear evidence that it is the investment bankers who rigged the share

prices and reaped the benefit.

The ult imate wreckers were the investment bankers. When

investment bankers compete to promise the highest pricing range,

the winner in this informal bidding process will often suffer from a

w i n n e r ' s curse. Then they resort to price r igging to deliver the

promised range.

Investment bankers admit that this could have happened, but

claim that all these are things of the past. Since the last two years, it

has been difficult to rig prices. However, investment bankers have

done very little to back up this claim. As late as September 1996 price

manipulat ion was witnessed in the State Bank of India (SBI) counter.

Here, instead of rigging the price upwards, it was important for those

interested to force the price down. While the markets were steady

sustained hammering by foreign investors drove down the price of

SBI to a six-month low immediately following the announcement of

the road show for the $ 350 million in early September. The slide

began on 11 September, the day the road show was announced. By

20 September, the day the road show started the price had dropped

to Rs. 239. Unnamed FIX investors had by then sold 1.25 crore shares

in the space of one week. While the share price fell by Rs 14 on 3

VI.57

October in the domestic market, the investment bankers priced the

GDR at a premium of 5.12 percent at Rs. 251.23 a share. The GDR was

oversubscribed by two times and was declared a thumping success.

The investment bank could pat itself on its back, having achieved a

premium on the prevailing domestic price. Nobody however talked

about the fact that this was achieved after some sustained hammering

of the SBI stock on the BSE.

6.42 Doctored Research

As for the much vaunted research reports done by the investment

banks on companies it is now a well-known fact that many of them

were prepared with one eye on a GDR mandate. No investment banker

would put out a sell on a company and dare try getting a mandate

from a promoter. So one will always see a buy recommendation by

i n v e s t m e n t banks in the r u n - u p to the GDR issue if they are

interested in obtaining the mandate.

There is a clear case for a mechanism whereby investors should

rely on research reports from independent research firms which are

more reliable than those from investment banks. The researcher would

like to point out the instance of Ashok Leyland, a leading truck

making company. Most investment bankers know that they may come

out with a second GDR issue. They have all put out a buy on the

company. But the fact is that the company is going through a very

tough period in the market-place. Its performance in the past has at

best been average. For the first six months, the company went into

VI.58

the red and is unlikely to come out of the mess in the second half.

And its first GDR, issued a few years ago, is quoting at a 74 percent

discount. Yet an investment banking arm of a premier British bank,

for example, has had a buy recommendation right from the time the

share price was quot ing at Rs. 200 two years back to the Rs 32

c u r r e n t l y . Even by the very shor t term focus of ana lys ts this

company would not be a good buy.

Another case in point is Peregrine India 's research report on

MTNL. It was a sell at Rs 236 a year back. After Peregrine got into

the race for MTNL's GDR mandate, the report became a buy at Rs

250. The researcher would like to cite another example of ONGC

where most inves tment bankers have a buy recommendat ion in

anticipation of a proposed GDR issue. Investment bankers in order

to sell GDRs prepare research which focuses on the immediate term

rather than the long term prospects of such issuers.

Templeton has escaped much of the mess by focusing on the

long term prospects of issuers and conducting lots of its research in-

house. Others have not been that lucky. In fact a pattern can be

detected in the way many of the companies that issued GDRs have

performed. They generally tend to do well in the year immediately

following the issue probably because of the infusion of GDR funds,

but after that the profits start declining. Take for example, J K Corp.

which issued a $55 million GDR in October 1994, its profits rose

57 percent in the year following the GDR to Rs 52 crore, remained

VI.59

stagnant the next year at Rs 52 crore but slid into a loss of Rs.l8 crore

the year after . In the case of JCT, the profits rose 71 percent to Rs 65

crore in the year immediately after the $45-million GDR in July 1994,

declined to Rs 17 crore the next year, which turned to a loss of Rs 14

crore the year after. Similarly Core Parental 's profit rose 76 percent

to Rs 37 crore the year after it issued $70 million worth GDRs in June

1994, but declined to Rs 21 crore the year after, which was followed

by a loss of Rs 84 crore the next year.

Admit t ing that analysis of Indian companies were not of the

highest quality. Sale of Jardine Fleming ,one of the biggest issuers of

GDRs from this country says " Analysts can't really predict beyond

what happens in one year If they could do that we would all be

billionaires. The earnings are predicted so as to be met at the end of

that financial year. After the first year the level of accuracy declines".

But there are many Indian companies who don ' t even fit into this

rather generous assessment of the ability of analysts. Companies like

Sanghi Polyes ter , C r o m p t o n Greaves , H i n d u s t a n Deve lopment

Corporation and Ballarpur have shown reduced, profits from the same

year in which their GDRs were issued putting paid to any claim that

only companies with prospects of rising profitability are able to

access the international capital market.

The way investment banks work the entire process results in

issuers getting the maximum price for the GDR issues at the cost of

the investors. And this pursui t could lead" to some material facts

VI.60

being ignored or suppressed deliberately or otherwise. There are

numerous examples of these if one goes through the roster of Indian

GDRs. Take the NEPC Micon issue lead managed by Jardine Fleming.

The company's books were not reconciled even by the lenient Indian

accounting s tandards and its profit figures were always taken with a

pinch of salt. The company's promoter was facing a case of fraud

filed against him by PNB for Rs 8 crore regarding another company

promoted by him. Even the lax Indian watchdog had forced the group

to display the case as a prominent risk factor in all its local issues.

The GDR offer document fails to record this. It is very difficult

to believe that the inves tment bankers d i d n ' t know about this

considering the publicity the case received in India.

Of course, to be fair to the analysts, any prediction of future

profitability of Indian companies in the early days of liberalization

' in 1993 and 1994 was a risky business. What fund managers and

inves tors abroad had failed to read was that the l iberal izat ion

process had forced upon the Indian industry a traumatic restructuring

process which will continue for many more years. Suddenly companies,

both big and small were made to bear the pain of moving from an

environment of a protected and inward-looking economy to that of a

free and intensely competitive market-place Abolition of licensing

lower ing of impor t tariffs, l iberal izat ion of foreign investment,

freeing of bank interes t rates, the r ising might of inst i tut ional

investors, t ightening of credit norms, a depreciating currency, all

combined to push many Indian companies to the brink.

VI.61

6.43 Fundamental Mistakes

Century Textiles, a company which was once considered to be

the bluest of blue chips on the Indian stock market, provides a good

example of how inves tment bankers and inves tors misread the

Indian corporate sector. Part of the B.K. Birla group, the company

whose interest include textiles, cement, fiber and shipping suddenly

found itself unable to meet with the rigors of both domestic competition

and the rapidly globalizing Indian commodities business cycle. Its

profitability has been on a steady decline much through the 1990s,

and the company posted its first ever loss in the first six months of

this year. Not surprisingly, century's share price has declined by 90

percent since 1993. Yet, in September 1994, the company did not have

any problem raising $ 100 million from GDR issue lead managed by

Paribas Capital Markets and SBC Warburg. SBC warburg admits that

analysts were unable to predict the downturn in Century's fortunes,

and its GDR is currently quoting at a discount of 87 percent to its

issue price. The company still has some very good assets, but does

not r ecommend it as a buy stock to his cl ient any more . The

company needs to refocus its businesses.

DCW is another example. A caustic soda major, D C W s GDR

is quoting at a steep discount of 85 percent. Today due to a global

oversupplv, caustic soda prices don ' t even cover its power costs. But

a simple sensitivity analysis should have exposed the competitive

weakness of a company like DCW. Another company is Arvind Mills.

VI.62

The company, despite being a very competitive producer of textiles

in all the three years prior to its 1994 GDR issue, had earned more

than 50 percent of its pre-tax profits from treasury operations. Even

the GDR offer document made it clear that it intended to invest a

part of the proceeds in loans to its sister companies. Still it found

takers . Today the company continues to be more of a peripheral

finance company with more than half of its profits continuing to come

from treasury operations Also the company has a lot of interlocking

investments in sister companies. The markets have taken a negative

view of such companies and Arvind 's GDR is today quoting at $ 1.63,

a whopping 84 percent decline on the issue price of $9.78.

But in the heady days of 1993,1994 and 1995 Indian companies

of course were more than eager to exploit this blindfolded enthusiasm

of foreign fund managers and investment bankers to invest in the

country. In 1994, the biggest year for Indian GDRs, as many as

35 companies raised money from international investors. Many of

these companies had such dubious reputations that they could not

have done a domestic public issue. Even worse they did not even

have a clear explanation on the road show or in their prospectus as

to what use the GDR money was being put to. Yet, European and

American fund managers were lapping up the issues as if there was

no tomorrow. A large number of the GDR companies brought home

the money and invested them in unproductive real estate in cities

like Delhi and Mumbai when prices have since crashed.

VI.63

6.44 End of the Mad Run

The good times of course were not going to last forever. The

action began to taper off towards the middle of 1996. Starting around

1996 investors had wizened up to the realities of the market-place

and there has been a flight to qual i ty . Many issues have been

abandoned by companies and bankers. Only five Indian companies

have launched GDR issues since August 1996 and except for Tata

Engineering none of these are quoting at a discount. The difference

here is that except for Tata Engineering, India ' s largest private

sector company, the other four are state controlled corporations, two

banks-Industrial Credit and Investment Corporation of India limited

and State Bank of India, the telecom services provider Mahanagar

Telecom Nigam Limited and Videsh Sanchar Nigam Limited, the

monopoly international telecom services provider.

Unlike elsewhere in the world many of the Indian government

run companies which are being progressively privatised, are viewed

as well run more focused and better placed to meet the emerging

international competition. With most of the better run large private

companies having made their GDR offerings in the recent past, the

researcher sees quality issues coming only from the state-controlled

companies. As for private companies, if they do have to make a GDR

offering, they will have to be exceptionally well run. BPL, which tried

to make an ADR offering in the US market last year , for example,

had to wi thdraw the issue after investors offered far less than the

\T.64

asking price. It eventually raised the money through a private placement.

As for the inves tment bankers the India score card is not

something that many would be proud of. J.P.Morgan seems to have

done the best with two out of its three issues quoting at a premium.

The leader of the pack, Jardine Fleming, which raised $1.7 billion

through 13 offerings, has had a mixed record, ten of the 13 issues it

managed are currently quoting at a discount. Merrill Lynch has turned

out a similar performance, ten out of its 13 issues are quoting at a

discount. But worse off are the likes of HSBC and BZW who have six

issues each in the discount category, quoting at a discount in excess

of 30 percent.

6.45 American Deposi tory Receipts

International investors have become increasingly interested in

overseas markets as a result of their higher yields compared to the

scenario of confining their investments to a limited horizon. This has

also helped the investors in achieving the objective of spreading their

risk and diversify their portfolios both geographically and by industry

sector. Today if an investor wishes to enlarge the scope of the his

investment holdings and wishes to look beyond the boundaries of

the country of his residence he can make investments in the shares of

a company as a foreigner or alternatively he can subscribe to the

shares of a foreign company offered in his countrv or through the

international market in the form of Depository receipt (DR).

VI.65

The specific ins t ruments for these markets are commonly

known as ADRs or EDRs i.e., American Depository Receipt and Euro

Deposi tory receipt . A Global Deposi tory Receipt (GDR) on the

contrary is a common instrument which provides access to American

as well as European Markets.

6.46 What is An American Depository Receipt ?

American Depository Receipt (ADR) is a negotiable instrument

d e n o m i n a t e d in US do l l a r s and i s sued by a d e p o s i t o r y bank

r e p r e s e n t i n g o w n e r s h i p in non-US secur i t ies r ep re sen t ing the

unde r ly ing o rd inary shares . The most impor tan t dist inction for

issuers of ADRs is that some structures allow the company to raise

capital in the US while others simply provide a mechanism facilitating

the US investors to buy and trade existing shares.

The advantages of European Depository Receipt (EDR) and a

Global Depository Receipt (GDR) program are almost similar to those

of an ADR program. The advantages can be summarized follows:-

i) Simplify the trading and settlement of foreign equities;

ii) Offer lower trading and custody costs as compared to

shares bought directly in the foreign market;

iii) ADRs are termed as domestic securities and that makes

it possible for many US bank and pension fund portfolios

to invest which are otherwise prohibited to invest in

non-domestic issues;

VI.66

iv) Enhance the liquidity of the underlying shares of the

issuer;

v) ADRs can be used as an equity financing tool in merger

and amalgamation transactions.

6.47 ADR Types

ADRs are divided into four broad categories as follows:-

Sponsored ADR:Level -I

It is the eas ies t and least e x p e n s i v e type of ADR for a

company. It involves the filing of an F-6 registration statement and

full disclosures as envisaged under Rule 12g3-2b of SEC are exempted.

This type of ADR are traded on the Over -The-Counter Exchange

(OTC) and offer liquidit}' on a moderate level. The salient characteristics

can be summarized as follows:-

i) Full compliance with the SEC'S reporting requirements

not required;

ii) Greater control is possible by issuer due to working with

A single depository bank than would be the case and with

an unsponsored program;

iii)The depository acts as a channel of communication

between the issuer and its US shareholder base Dividend

payment financial statements and details of corporate

actions will be passed on to US investors via depository;

iv) The depository bank maintains accurate shareholder

VI.67

records for the issuer and can if requested monitor large

stock transactional and report them to the issuer;

v) Offer significant savings in terms of issue and transaction costs;

vi) Graduat ion to Level-II or III is comparatively easy and

inexpensive as the issuer and depository bank do not

have to negotiate cancellation of unsponsored ADRs with

several depositories as would be the case if upgrading

an unsponsored program.

However , the Level-I ADR cannot be listed on any of the

national exchanges in the US which imposes a barrier to a large scale

marketing of the company issue and restricts the reach to investors.

6.48 Level-II ADR

A Level -II ADR is an upgradation over the level-I ADR and

neces s i t a t e s c o m p l i a n c e wi th full r e g i s t r a t i o n and r e p o r t i n g

r e q u i r e m e n t s of SEC. In add i t i on to filing an F-6 reg is t ra t ion

statement, the issuer is also required to file SEC Form 20 F and

to comply wi th the SEC and other d i sc losure rules inc lud ing

s u b m i s s i o n of i ts a n n u a l r e p o r t wh ich m u s t be p r e p a r e d in

accordance with US-GAAP. Registration, allows the issuer to list its

ADRs on one of the three major national stock exchanges NYSE, AMEX

or NASDAQ. The significant characteristics of a level-II are as foUows:-

i) Offers greater liquidity and access to large investors due

to its listing on three big exchanges of US and world;

ii) The issuer gets greater visibility and mileage due to List

VI.68

ing on major stock exchanges;

in) The stringency of US laws regarding disclosures permit

greater transparency with regard to any change in

ownership etc.

However SEC regulat ions are lengthy and do not permit a

publ ic offering of ADRs unde r a Level-II p r o g r a m . It is more

expensive and time consuming to set up and maintain a Level-II

program because of more stringent reporting requirements and higher

legal and accounting and listing costs.

Level-I l l

There is not much difference in terms of procedural formali­

ties to be completed at the SEC or other national stock exchange to

get listing to the ADR issue and the Level-Ill is more expensive in

terms of flotation cost besides offering a much larger reach to investors.

A Level-Il l ADR permits public offerings in the US. This

widens the scope of financing and entails greater manoeuvrability.

For ins tance , ra i s ing of capi ta l to f inance acqu i s i t ions or the

establishment of an employee stock option program for the issuer's

subsidiary.

However, the issuance of Level-Ill ADR encompasses onerous

reporting requirements and a high incidence of issue costs.

VI.69

Restricted or Rule 144(a) ADRs

Restr icted ADRs are s imply pr iva te ly placed depos i to ry

receipts which are issued and traded in accordance with Rule 144(a).

The objective behind introduction of this rule was to pave way for

non-US investors to tap investments in US qualified institutional

buye r s (QIB) aim at a id ing l iquidi ty to the p r iva te p lacement

market. A QIB is currently defined as an institution which owns and

invests on a d iscre t ionary basis at least US $ 100 mill ion or in

securities of an unaffiliated entity.

Non-US companies now have easy access to the US equity

private placement market and may thus raise capital through the

issue of restricted ADRs without conforming to the full SEC registration

and reporting requirements. Additionally, the cost of issuing Rule

144(a) ADR is considerably less than cost of initiating a Sponsored

Level ADR. ADRs offered under Rule 144(a) are exempt from full

SEC reporting and registration requirements

6.49 ADR vis-A-Vis EDR & GDR

EDRs and GDRs are generally denominated in US dollars but

may be denominated in any currency.

It is now commonplace to have fungible securities listed and

cleared in more than one market . The lines that exist between

Euroclear and Cedel in Europe and DTC in the US allow for efficient

and trouble free settlement of securities between these two major markets.

VI.70

Just as ADRs allow non-US issuers to access the important US

market, EDR allow issuers to tap the Euro-markets. GDRs far more

common than EDR, give access to two or more marke t s more

frequently in the US market and the Euro-markets with one fungible

security. EDRs and GDRs are most commonly used when the issuer

is raising capital in the local market as well as in the international

and US markets either through private placement or public offerings.

The US component of GDR is normally structured either as a

Level-III ADR with full disclosure and reporting to the SEC or pri­

vately placed under Rule 144.

6.50 Conclus ion

For Indian companies , the GDR route appears to be more

lucrative considering the fact that a GDR can also be marketed in US

as compared to an ADR. The ability of Indian companies to go for a

level-II and III ADR appears somewhat premature considering the

requisite size of operations to justify the costs of such a flotation and

the cumbersome reporting requirement. Looking at the emerging

t rends in the capital marke t it is in the best in teres t of Indian

corporates to start maintaining their accounts as per the international

s tandards to avoid any recasting at the time of capital flotations.

This would also increase the credibility of Indian companies among

the investors and demand a revision in the respective regulations.

Presently the option of a privately placed Rule 144(a) or a

VI.71

Level-I ADR would make greater sense for an average Indian

company subject to the advice and recommendation of the placement

agents and merchant bankers.

\T.72

Select References - Euro Issues

1 Chona J.M., " Role of RBI - Regulatory, Developmental and

Constitutional aspects", RBI Occasional papers, Sept.

- Dec. , 1991.

2 Arora Mukesh, "Global Depository Receipts", The Chartered

Accountant, 1994.

3 Jain V.S., "Launching of successful GDR offering". The Management

Accountant, May 1996.

4 Lessard D. et.al. , " In ternat ional Financial management" ,

Mc Graw Hill Publications, New York, 1990.

5 Economic Survey of India, Various issues, 1991-1999.

6 Datta Subhasish, "Euro Issues", The Management Accountant,

Jul.1994.

7 Nag Anirban and Mathew Biju, " Templetons to unveil $ 100

mil l ion income fund, focus on India , Indonesia ,

Singapore", Financial Express, Aug 6, 1997.

8 Agrawal G.C.R. , "Emergemce of Euro-Issues as source of

i n t e r n a t i o n a l f inancia l f low". The M a n a g e m e n t

Accountant, Nov. 1997.

9 Agrawal Bipin, "Raising Global Finance through ADR", Chartered

Secretary, July 1997.

10 Rangnekar S.D., "RBI caps d iv idend on preference to

foreign entities at 15 % . ", Economic Times, Sept. 27,1999.

VI.73

11 Sethuraman K. "Euro Issues- Procedural Requirements"^

Chartered Secretary , Nov. 1994.

12 Venugopalan S., "Euro Issues at a glance". Chartered Secretary,

Nov. 1994.

13 Notification issued by the ministry of finance. Department

of Economic Affairs vide No s - l l (25) /cc I I /89 /NRI

da ted 1 2 / 1 1 / 1 9 9 3 r e g a r d i n g issue of FCCB and

ordinary shares through Depository Receipt Mechanism

Scheme 1993.

14 Radhakrishan N. and Kartikeyan M., "The Indian GDR",

Business India, Feb.23-Mar.8,1998.

15 Mistry S., " TELCO to raise Rs. 300 Crore for Indica, other

capex plan ", Financial Express, Aug. 25, 1997.

16 H o m e V. and James C , "Financial Market Rates and Flows",

prentic Hall Inc. , New Jercy, 1990,

17 Chaudhari D. and Saxena M., " Apollo Tyres likely to tread

ECB route to bring down cost of capital", Financial

Express, Aug. 9, 1997.

VL74