Adr gdr ecb__swap_hari.13531504

HARI BALAJI I FM H I SRU-COLLEGE OF M ANAGEM ENT I M AY 2011

ADR & GDR


WHAT IS ADR

ADR - American Depositary Receipts
• A negotiable certificate issued by a U.S. bank
• Represents a specified number of shares of a foreign
company
• ADRs are denominated in U.S. dollars.


HOW DOES ADR/GDR WORK ?

• Let us take Infosys example – trades on the Indian stock at
around Rs.2000/-
• This is equivalent to US$ 40 – assume for simplicity
• Now a US bank purchases 10000 shares of Infosys and issues
them in US in the ratio of 10:1
• This means each ADR purchased is worth 10 Infosys shares.
• Quick calculation means 1 ADR = US $400
• Once ADR are priced and sold, its subsequent price is
determined by supply and demand factors, like any ordinary
shares.


ADR RATIO

• Single
1 ADR = 1 SHARE
ADR Ratio = 1:1
• Multiple
1 ADR = 5 SHARES
ADR Ratio = 1:5
• Fraction
1 ADR = ½ SHARE
ADR Ratio = 2:1


SPECIMEN COPY OF ADR


ADR

TYPES of ADR: ADR listing:
Unsponsored ADR NASDAQ
Sponsored ADR AMEX
Level 1 NYSE
Level 2
Level 3


ADVANTAGES OF ADR

• It is an easy and cost effective way to buy shares of a
foreign company
• Reduces administrative costs and avoids foreign taxes on
every transaction
• Helps companies which are listed to tap the American
equity markets
• Any foreigner can purchase these securities
• The purchaser has a theoretical right to exchange shares
(non- voting right shares for voting rights)


GDR - GLOBAL DEPOSITARY RECEIPTS

• A bank certificate issued in more than one country for
shares in a foreign company

• Offered for sale globally through the various bank
branches

• Shares trade as domestic shares


GDR - CUSTODIAN BANK/DEPOSITORY BANK

• Custodian Bank located in same country
• Works with the Depository Bank and follows instructions
from the depository bank.
• Collects, remits dividends and forwards notices
received from the depository bank.


GDR MARKET

• GDRs can be created or cancelled depending on demand
and supply.

• When shares are created, more corporate stock is placed in
the custodian bank in the depositary bank account. The
depositary bank then issues the new GDRs

• Factors governing GDR prices are company track record,
analysts recommendations, relative valuations, market
conditions and also international status of the company


GDR LISTING

• London Stock Exchange

• Luxembourg Stock Exchange

• Singapore Exchange

• Hong Kong Exchange


GDR- ADVANTAGES & DISADVANTAGES

• GDRs allow investors to invest in foreign companies without
worrying about foreign trading practices, laws
• Easier trading, payments of dividends are in the GDR
currency
• GDRs are liquid because they are based on demand and
supply which is regulated by creating or cancelling shares
• GDR issuance provides the company with visibility, more
larger and diverse shareholder base and the ability to raise
more capital in international markets
• However, they have foreign exchange risk i.e. currency of
issuer is different from currency of GDR


I N SI M PLE TERM S ADR / GDR I SSUE

COMPANY SHARE

DEPOSITARY BANK

INVESTOR


DI FFERENCE - ADR & GDR

• Both ADR and GDR are depository receipts, and represent a
claim on the underlying shares. The only difference is the
location where they are traded.

• Depositary receipts traded in USA – ADR

• Depositary receipts traded in a country other than USA -
GDR


I NDI A - ADR & GDR

• ADRs and GDRs are an excellent means of investment for
NRIs and foreign nationals wanting to invest in India
• By buying these, they can invest directly in Indian companies
without going through the hassle of understanding the rules
and working of the Indian financial market – since ADRs and
GDRs are traded like any other stock
• NRIs and foreigners can buy these using their regular equity
trading accounts


INDIAN COM PAN IES USIN G ADR/ GDR

COMPANY ADR GDR

Bajaj Auto No Yes
Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes
Infosys Technologies Yes Yes
ITC No Yes
L&T No Yes
MTNL Yes Yes
Patni Computers Yes No
Ranbaxy Laboratories No Yes
Tata Motors Yes No
State Bank of India No Yes
VSNL Yes Yes
WIPRO Yes Yes


ECB


ECB

• The ECB is the central bank for Europe's single currency, the
euro.

• The ECB’s main task is to maintain the euro's purchasing power
and thus price stability in the euro area.

• The euro area comprises the 17 European Union countries that
have introduced the euro since 1999.

ECB - TASKS

The tasks of the ESCB and of the Eurosystem are laid down in
the Treaty establishing the European Community. They are
specified in the Statute of the European System of Central Banks
(ESCB) and of the European Central Bank (ECB). The Statute is a
protocol attached to the Treaty.

The Treaty text refers to the ‘ESCB' rather than to the 'Eurosystem'.
It was drawn up on the premise that eventually all EU Member
States will adopt the euro. Until then, the Eurosystem will carry out
the tasks.

ECB – OBJECTI VES

"The primary objective of the ESCB shall be to maintain price
stability".
and:
"without prejudice to the objective of price stability, the ESCB
shall support the general economic policies in the Community
with a view to contributing to the achievement of the objectives
of the Community as laid down in Article 2." (Treaty article 105.1)

The objectives of the Union (Article 2 of the Treaty on European
Union) are a high level of employment and sustainable and non-
inflationary growth.

ECB – BASI C TASKS

According to the Treaty establishing the European Community
(Article 105.2), the basic tasks are the definition and
implementation of monetary policy for the euro area;
• the conduct of foreign exchange operations;
• the holding and management of the official foreign reserves
of the euro area countries (portfolio management).
• the promotion of the smooth operation of payment systems.

SWAP


SWAP

• Swap is an agreement between two parties, called
counterparties to trade cash flows over a period of time.
• Swaps are flexible and are useful in many financial situations
• There are 2 types of swap:
 Currency swap
 Interest- rate swap


SWAP

• Specifically, the two counterparties agree to exchange one
stream of cash flows against another stream. These streams
are called the legs of the swap.
• The swap agreement defines the dates when the cash flows
are to be paid and the way they are calculated.
• Usually at the time when the contract is initiated at least one
of these series of cash flows is determined by a random or
uncertain variable such as an interest rate, foreign
exchange rate, equity price or commodity price.


SWAP

• These two swaps can be combined when interest on loans in
two currencies are swapped.
• The interest rate and currency swap markets enable firms to
arbitrage the difference between capital markets.
• For example, in the case of a swap involving two bonds, the
benefits in question can be the periodic interest (or coupon)
payments associated with the bonds.


Adr gdr ecb__swap_hari.13531504

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