EURO ISSUES - GLOBAL DEPOSITORY RECEIPTS
By Sameer Chaini
Many large companies in India require foreign exchange for importing 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 requirements. The acceptable security was a guarantee given by a bank or a financial institution in India. In the early nineties, the foreign exchange reserves of the country 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 EXIM bank of India and other financial institutions like ICICI who had foreign lines of credit from International Finance Corporation or other international agencies, for foreign currency loans. By middle of 1991, the liberalization of the Indian economy was set in motion. There was an earnest attempt to integrate India with the global market. The emerging transparency and decontrols attracted the attention of many foreign investors. The foreign equity investors appreciated the liberal policies of the Indian Government and identified huge stakes in the emerging Indian capital market. In February’92, while presenting the budget, the finance minister announced government’s decision to allow the FIIs to invest in the Indian capital market and to allow Indian companies with good track record to float their stocks in foreign markets with a view to augmenting the forex reserves of the country. So far, Indian companies floating GDRs have been following the route of Rule 144A of SEC for issuance of GDRs. Primary reason for doing so is that by issuing securities under Rule 144A, there is no need for prior registration of securities with SEC. Further, information requirements in the offer documents in case of private placement is discretionary and is not very comprehensive. At the same time, liquidity is not affected as the securities can be sold by one qualified institutional buyer (QIB) to another. Further, a point to be noted is that such unregistered securities cannot be sold in the U.S. public market for at least 2 years unless the said securities are registered with SEC. Majority of the companies list on the Luxembourg Stock Exchange because it has minimum listing formalities and comparitively low listing fees. The other option is to register the securities with SEC, based on exhaustive SEC registation documents in which case individuals can subscribe to the securities offered in the U.S. markets. Herein, detailed disclosure norms of U.S. GAAP have also to be complied with. As per the estimates, the cost of preparing and filing the US GAAP account ranges from $500,000 to $1,000,000 with the ongoing costs of $150,000 to $200,000 per annum. The initial SEC registration fees, which are a percentage of the issue size as well as “blue sky” registration costs (permitting the securities to be offered in all states of the USA) would have to be met. 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...
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