Chapter - 1
INTRODUCTION OF FINANCIAL MARKETS
The Indian economy is the second fastest growing economy in the world after China with a growth rate of 6.5%. India seems to have become an investor’s haven with high returns on investments for foreign Institutional investors. Indian companies are recording higher profits and are gaining global recognition because of operations in several countries. However, for international presence, Indian companies need funds from time to time to expand their business. Companies either raise funds from the domestic market or through international market. For international funding, the most popular source amongst the Indian companies in the recent times has been American Depository Receipts (ADR) and Global Depository Receipts (GDR). The Finance Ministry has projected inflows of $4.5 billion through the ADR/GDR/FCCB (Foreign Currency Convertible Bond) route during the current fiscal year. This chapter deals with the concept of ADR/GDR, the process involved in such issues and the recent changes made by the government in the regulations for ADR/GDR. ADR/GDR – The concept
ADR/GDR are negotiable certificates that enable domestic investors of a country to own shares in foreign companies. ADR/GDR are issued by non resident companies to residents of another country through depositories situated in the country from which a company intends to raise funds through depository receipts. Each unit of ADR/GDR represents a given number of a company’s shares and can be traded freely as any other security in the capital market. The role of depositories in an issue of ADR/GDR is very crucial, as depositories act as custodians of the shares, against which the ADR/GDR are issued. As the names suggest, ADR are issued in American capital markets while GDR are issued in all other countries. Procedure
The procedure for issue of ADR/GDR is different from issuing shares in the domestic capital market. The ADR/GDR are issued on the basis of the ratio worked out by the Indian company in consultation with the lead managers of the company. The Indian company issues its rupee denominated shares in the name of the overseas depositories and such issued shares are kept in the custody of the domestic custodian in India. On the basis of the ratio worked out and the rupee shares kept with the domestic custodian, the depositories issue ADR/GDR to the investors outside India. Statutory provisions
Regulations under the Foreign Exchange Management Act, 1999 (FEMA) allow Indian companies to issue shares through ADR/GDR. Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993 (FCCB & ADR/GDR Scheme) and the guidelines issued by the Ministry of Finance (MoF) from time to time set out the rules and regulations for issue of ADR/GDR by Indian companies. The MoF has allowed Indian companies to raise ADR/GDR under the automatic route under which there are simpler reporting requirements to the RBI. Requirements for raising ADR/GDR in view of the recent changes in the FCCB & ADR/GDR Scheme by MoF. To bring the issues of ADR/GDR in line with the Security Exchange Board of India (SEBI) guidelines on ‘Domestic Capital Issues’ i.e. public offers, the Finance Ministry recently amended the FCCB & ADR/GDR Scheme11 whereby from August 2005 it is mandatory for all Indian companies to be a listed company on any of the Indian stock exchanges before issuing FCCB bonds or ADR/GDR or a simultaneous listing of shares of the applicant company is required. Statutory requirements
The requirements for companies under the applicable statutory provisions for issuing ADR/GDR are as follows: FCCB & ADR/GDR SCHEME
(i)A company must not be barred from raising funds from the Indian capital market nor restrained from accessing the securities market by SEBI. (ii)The applicant company must be a listed...