1.

Introduction
Increasing Globalisation and investor appetite for

diversification offer a unique opportunity to companies looking to tap a new investor base, expand awareness or raise a capital by creating depositary receipts program gained the flexibility and access you need to achieve companys strategic goals.1

What is Euro Issue? There is not any specific definition given under the law about Euro Issue. If we want to define Euro Issue in general term then we can say that A Euro issue is a issue where the securities are sold in international market to individual and institutional investors. Euro securities are negotiable and transferable securities distributed by a syndicate market intermediaries and Underwriters, By an Euro issue, a company is able to raise at cheaper rate.

As per Indian prospective the researcher can say that mode of rising funds by an Indian company outside India in foreign currency.2it also denotes an issue of securities abroad. (normally listed on an European Stock Exchange).

What is Depository Receipt ? A Depository Receipt is a Negotiable Financial Instrument issued by a bank to represent a foreign Companies publically traded
1 2

Researcher has taken this part from the Article available on the Depository Receipts. Researcher has taken this part from the article on euro issue.

securities. The depository receipt trades on a local stock exchange. Depository Receipts make it easier to buy shares in foreign companies because the shares of the companies dont have to leave the home state.

Types of Depository Receipt a. American Depository Receipt b. European Depository Receipt c. Luxembourg Depository Receipt d. Global Depository Receipt e. Indian Depository Receipt

a. American Depository Receipt

An American Depository Receipt (ADR) is a negotiable security that represents securities of Non-U.S. company that trade in the U.S financial Markets. Securities of a foreign Company that are represented by an ADR are called American Depository Shares (ADSs)

Shares of Many Non- U.S. Companies trade on US stock exchange through ADRs. ADRs are denominated and pay dividends in US dollars and may be traded like regulars shares of stock. Over the Counter. ADRs may only trade in extended hours.

The first ADR was introduced by J.P.Morgan in 1927, ADRs are simple in concept. In the most basic terms, A United States bank or

investment institution places a certain amount of stock of a foreign company into its vaults - the "depositary" part of the name - then allows investors to buy shares in that collection of stocks, priced in US dollars.3

Those shares, or receipts, can then be traded on regular stock markets almost as though they were shares held directly in the foreign company itself, only the arrangement is better for US investors. Since ADRs are traded in US dollars and are securities that originate within the United States, they carry none of the crossborder fees or other hassles that might ensue if an investor from Peoria were to try to buy stock directly in a South Korean steel mill. The worst most investors have to worry about are small fees, often a few pennies per ADR per year, charged by the depository institution to cover their costs of offering the service.

b. What is Global Depository Receipts? Global Depositary Receipts (GDRs) give issuers exposure to the global markets outside their home market.GDRs are offered to investors in two or more markets, and are most commonly used to raise capital in Europe and the US.
4

Depository Receipts (DR)

generally dominated in US dollars, represents ownership in nonresident securities i.e. Underlying shares of an Overseas company.

3 4

Researcher has taken this part from the Article on American Depository Receipts. Researcher has taken this part from the Article on Global Depository Receipts.

The typical GDR structure combines a depositary receipt offered in Europe under Regulation S (Reg S) witha depositary receipt offered in the US (an ADR). Reg S DRs are listed on a European stock exchange such as London or Luxembourg and clear through the Euromarket clearing systems, Euroclear and Clearstream. The ADR may be publicly listed on a US exchange and offered to retail investors, or privately placed.with Qualified Institutional Buyers pursuant to Rule 144A.

In recent years, capital raising using GDRs has increased steadily. Accounting for less than one percent of the market in 2000, in 2005 GDRs accounted for nearly 45% of all capital raised using depositary receipts worldwide.

The rise of sophisticated international markets has driven a shift towards Global Depositary Receipts as global corporations

increasingly seek to raise capital in other markets. Between 2004 and 2005 alone, the use of GDRs increased by more than 8%.5

The main Difference between ADR and GDR Both ADR and GDR are depository receipts, and represents the claim on underlying shares. The only difference is the location where they are treated. If the Depository Receipts is traded in the United States of America. It is called American Deporitory Receipt or

Researcher has taken this part from the Article on Global Depository Receipts.

ADR. If the depository receipts traded in a country other than a USA. It is called Global Depository Receipt or GDR.GDRs and ADRs are excellent ways to buy shares in an Indian company while realizing any dividends and capital gains in U.S. dollars/Euro.

2. Regulatory Frame Work of GDR/ADR under Indian Law

Provisions Under Foreign Exchange Management Act 1999 In Foreign Exchange Management Act, 1999 there is a sub act of foreign currency convertible bonds and ordinary shares (through Depository Receipt Mechanism) scheme 1993 and another sub act of FEMA which also deals with the provisons of GDR is Foreign Exchange Management (transfer or issue of security by a person resident out side india) Regulations, 2000.

Foreign currency convertible bonds and ordinary shares (through Depository Receipt Mechanism) scheme 1993.

Eligibility for issue of convertible bonds or ordinary shares of issuing company. 3. (1) An issuing company desirous of raising foreign funds by issuing Foreign Currency Convertible Bonds or ordinary shares for equity issues through Global Depositary Receipt is required to obtain

prior permission of the Department of Economic Affairs, Ministry of Finance, Government of India:

(i)

An Indian Company may sponsor an issue of ADRs/GDRs with an overseas depository against shares held by its shareholders at a price to be determined by the Lead Manager, in respect of : (a) Divestment by shareholders of their holdings of Indian companies listed in India. (b) Divestment by shareholders of their holdings of Indian companies not listed in India but which are listed overseas.

(ii) Such a facility would be available pari passu to all categories of shareholders of the company whose shares are being sold in the ADR/GDR market overseas. (iii) An approved intermediary under the scheme, would be an Investment Banker registered with the Securities and Exchange Commission in the USA, or under Financial Services Authority in U.K., or the appropriate regulatory authority in Germany, France, Singapore or in Japan. (iv) Such issues would need to conform to the Foreign Direct Investment Policy and other mandatory statutory

requirements and detailed guidelines issued in this regard. The provisions of paragraph (4B) of Schedule I to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 as

notified by Reserve Bank of India vide Notification No. FEMA 41/2001-RB, dated March 2, 2001, would also need to be adhered to.]6

1)(A) An Indian company, which is not eligible to raise funds from the Indian capital market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue (i) Foreign Currency Convertible Bonds and (ii) Ordinary Shares through Global Depositary Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.

(1)(B) Unlisted Indian Companies issuing Global Depositary Receipts/Foreign Currency Convertible Bonds shall be required to simultaneously list in the Indian Stock Exchange(s).]7 (1)(Ba) The unlisted companies issuing Global Depositary

Receipts/Foreign Currency Convertible Bonds that have taken verifiable effective steps, before 31st August, 2005 would be exempt from the requirement of prior or simultaneous listing provided these companies complete their issues latest by 31st December, 2005. Explanation : Effective steps, for the above purpose, will mean the following :

Researcher has taken this part from http://www.cainindia.org. Researcher has taken this part from http://www.cainindia.org/news/10_2010/issue_of_foreign_currency_convertible_bonds_an d_ordinary_shares.
777

(a) That the company has completed due diligence and filed offering circular in the overseas exchange(s); or (b) That approval of overseas exchange(s) has been

obtained; or (c) That the payment of listing fees is made; or (d) Approval of the Reserve Bank of India under Foreign Exchange Management Act, 1999, where applicable, for meeting issue related expenses has been obtained.

It is clarified that private placements of issues, where no offering circular was placed before the overseas exchange(s), would not qualify for effective steps.]8

(1)(C) Erstwhile Overseas Corporate Bodies (OCBs) who are not eligible to invest in India through the portfolio route and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to (i) Foreign Currency Convertible Bonds and (ii) Ordinary Shares through Global Depositary Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.]

(2) An issuing company seeking permission under sub-paragraph (1) shall have a consistent track record of good performance (financial or otherwise) for a minimum period of three years, on the basis of which

Researcher has taken this part from http://www.cainindia.org/news/10_2010/issue_of_foreign_currency_convertible_bonds_an d_ordinary_shares.

an approval for finalising the issue structure would be issued to the company by the Department of Economic Affairs, Ministry of Finance.

(3) On the completion of finalisation of issue structure in consultation with the Lead Manager to the issue, the issuing company shall obtain the final approval for proceeding ahead with the issue from the Department of Economic Affairs. Explanation.For the purposes of sub-paragraphs (2) and (3) issue structure means any of the requirements which are provided in paragraphs 5 and 6 of this Scheme.

(4) The Foreign Currency Convertible Bonds shall be denominated in any convertible foreign currency and the ordinary shares of an issuing company shall be denominated in Indian rupees.

(5) When an issuing company issues ordinary shares or bonds under this Scheme, that company shall deliver the ordinary shares or bonds to a Domestic Custodian Bank who will, in terms of agreement, instruct the Overseas Depositary Bank to issue Global Depositary Receipt or Certificate to non-resident investors against the shares or bonds held by the Domestic Custodian Bank.

(6) A Global Depositary Receipt may be issued in the negotiable form and may be listed on any international stock exchanges for trading outside India.

(7) The provisions of any law relating to issue of capital by an Indian company shall apply in relation to the Issue of Foreign Currency Convertible Bonds or the ordinary shares of an issuing company and the issuing company shall obtain the necessary permission or exemption from the appropriate authority under the relevant law relating to issue of capital.9

Issue of Global Depositary Receipts. 3A. Indian companies engaged in Information Technology Software and Information Technology Services, are eligible to offer to their non-resident/resident permanent employees (including Indian and Overseas working directors) global depositary receipts against the issue of ordinary shares under the scheme subject to the operational guidelines/conditions issued from time to time by the Government.]

3B. Indian companies engaged in Information Technology Software and Information Technology Services as defined in recommendation No. 19(a) and (b) of the Notification dated 25-7-1998 issued by the Planning Commission, are eligible to offer also to the nonresident/resident permanent employees (including overseas working directors) of their subsidiary Indian and companies,

incorporated in India or abroad and engaged in Information Technology Software and Information Technology Services, Global Depositary Receipts against the issue of ordinary shares under the

Researcher has taken this part from http://www.cainindia.org/news/10_2010/issue_of_foreign_currency_convertible_bonds_an d_ordinary_shares.

Scheme subject to the eligibility conditions and operational guidelines/conditionalities announced from time to time by the Government.]

3C. Indian companies registered in India and engaged in the following sectors/areas, where 80 per cent of turnover is from these sectors/areas of the operation/business of the company in the three previous financial years are eligible to offer global depositary receipts against the issue of ordinary shares under the Scheme to their nonresident/resident permanent employees (including Indian and overseas working directors) and also of their subsidiary companies, incorporated in India or abroad, subject to the eligibility conditions and operation guidelines/conditionalities announced from time to time by the Government:

(i)

Information

Technology No.

(as and

defined (b) of

in

the

recommendation

19(a)

Gazette

Notification dated 25th July, 1999, issued by the Planning Commission) and Entertainment Software. (ii) (iii) (iv) Pharmaceuticals. Biotechnology. Any other activities within the knowledge-based sector as notified by the Government from time to time.

These norms would also be available for multi-product diversified companies which do not conform to the criteria of 80 per cent turnover as mentioned above but having an average annual export

earnings of Rs. 100 crores from the sectors mentioned above in the three previous financial years.10

Provision of the Indian Companies Act 1956. As per the Companies Act 1956 sec 81 (1A) emphasis on the shareholders must approve the proposed foreign issue of

GDR/ADRs by a special resolution passed at a general meeting. Approval should also be taken from the issuers share holder with regard to sec. 94 (increase in authorized share capital), sec 16 (alteration of capital clause in Article of Association).

Statutory Approvals

Approval of the Foreign Investment Promotion Board (FIPB)

Under the Foreign Exchange Management (transfer or issue of security by a person resident outside India) Regulations (Regulations) a person resident outside India may purchase share of an Indian Company under the foreign direct investment scheme, subject to the terms and conditions specified in schedule 1 of the regulations.

Schedule 1 provides that an issuer company which is engaged or proposes to engage in any activity specified in this

10

Researcher has taken this part from http://www.cainindia.org/news/10_2010/issue_of_foreign_currency_convertible_bonds_an d_ordinary_shares.

regard or beyond the specified sectoral cap, shall only issue share to a person resident outside India. Provided it has secure prior approval of secretariat for industrial assistance (SIA), or as the case may be of FIPB of the government of India and the terms and conditions of such an approval are complied with.

Reporting to the RBI

The issuing company is to required furnish a statement of exchange control department of R.B.I central office Mumbai, within 30 days from the date of closing, stating details of the issue such as number of GDRs issued , number of underlying fresh shares issued , capital structure before and after issue.

Stock Exchange Approval

All provisions of the listing agreement with the stock exchanges in India will apply with respect to the underlying shares of the company.

3. HOW Does ADR/GDR works ?

Example:Lets take an example of Infosys trades on Indian stock market at Rs. 540/-. This is equivalent to US$ 10 (assume for simplicity). Now a U.S. Banks purchases 10,000 shares of Infosys and issues them in US in the ratio of 10:1. It means 1 ADR purchased is worth 10 Infosys shares.Quick calculation means 1 ADR = US$ 100.Once ADR are priced and sold, its subsequent price is determined by supply and demand factors, like any ordinary shares. ADR issuance process Detail Issuing an ADR is a systematic process. Issuer has to follow certain chronological order to issuing ADR. Under this process Investor, broker, overseas securities market, local custodian then depository and finally broker has to played very much significant role.

Issuing process begins when Investor contact to the Broker and requests the purchase of shares of a DR (Depository Receipts) issuer company. If existing DR of that company are not available , then the issuance process begins.

To Issue new DR (Depository Receipts) the broker contacts a local broker in the overseas or issuers home market and advised him to purchase securities on behalf of them.

The next step is Local broker will purchase securities from the local market as per the direction of overseas broker. Now local broker will submit this security to the local custodian.

After that the local custodian instructs the Depository to issue DRs that represents the securities received. The Depository Issuers DRs and deliver them in physical form or book entry form. Finaly broker delivers DRs to the investor or credits the investors account.

Cancelation Process: The cancelation process is also very much interesting under ADRs. Its complete opposite process then the issuing process. The investor instruct the broker to cancel the DRs then broker delivers the DRs to the depository for cancellation. Then depository cancels the DRs and instruct the local custodian to release and deliver underlying securities to the sellers broker in the issuers home market. The local custodian delivers the underlying ordinary shares as instructed to the local broker. The local broker safe keeps the ordinary share or delivers them to or on behalf of the new visitors.

ADR/GDR listing:

ADR listing:

NASDAQ AMSE NYSE

GDR Listing:

London Stock Exchange Luxembourg Stock Exchange DIFX Singapore Exchange Hong Kong Exchange

4. Taxation of GDRs/ADRs
Taxation on shares issued under Global Depository Receipts Mechanism

Any income by way of dividend distributed, declared or paid (whether interim or otherwise) by any Indian company is exempt from tax and is not taxable in the hands of investor. However the Indian company declaring dividends will have to pay Indian dividend distribution tax at a current rate of 16.995% ( taking into account 10% education cess and 3% surcharges.11

On receipts of these payments of these dividend after taxation, the overseas depository bank distributes them to the non resident investors proportionate to their holding of GDRs evidencing the relevant shares. The holders of the depository receipts may take the credit of the tax deducted on the source basis on the certification by overseas depository bank. If permitted by their country of that residence.

All transaction of the trading of the global depository receipts out-side india among non resident investors will be free from any liability to income tax in India on capital games therefrom.

11

Researcher has taken this part from the Income Tax Act 1961.

If any capital gains arise from the transfer of the aforesaid shares in India to the non-resident investor, he is liable to income tax under the provision of the income tax act 1961. If the aforesaid shares are held by the non-resident investor for a period more than twelve (12) months from the date of their advice of their redemption by the overseas depository bank, The capital gains arising on the sale thereof are treated as long term capital gains and currently are not subject to any income tax under the provision of sec 115 AC of the income tax act, 1961 if such shares are held for the period of less than twelve (12) from the date of redemption advice, the capital gains arising on the sale thereof are treated as short term capital gain.Gains on sale of shares held for less then one year are taxed at 11.33% (10% surcharge and education cess).

After redemption of the Depository Receipts into underlying shares, during the period., if any which these shares are held by the redeeming non-resident foreign investor who has paid for these shares in foreign exchange at the time of the purchase of the Global Depository Receipts, the rate of taxation of income by way of dividends on these shares would continue to be 11.33% (10% surcharges and 3%education cess) in accordance with section 115 AC (1) of the act.

When the redeemed shares are sold on the Indian stock exchanges against payment in rupees, these shares shall go out of the purview of sec 115 AC of the act and income there from shall not be eligible for the concession tax treatment provided there under.

After the transfer of shares where consideration of term in rupee payment, the normal tax rate would apply to the income arising on or accruing on these shares.

TDS on the amount of capital gains accruing on transfer of shares would be made with according sec 195 and 196 of the Act.

The provision of Double Taxation Avoidance agreement will be applicable on the basis of the country of the overseas Depository banks, in the matter of taxation of income from dividends from underlying shares.12

Application of avoidance of double taxation agreement in case of GDRs/ADRs and underlying shares after redemption. During the period if any when the redeemed underlying shares are held by the non-resident investor on transfer from fiduciary ownership of the depository, before they are sold to the resident purchases, Indias treaty with the country of the residence of the nonresident investor will be applicable in the matter of taxation of the income by way of capital gains arising out of the transfer of the underlying shares to a resident of India or in India.

Stamp Duty and transfer tax Upon issuance of GDRs/ADRs, the issuer is required to pay a stamp duty 0.1% on the value (per value plus premium) of each

12

Researcher has taken this part from the Indian Income Tax Act 1961.

underlying share. A transfer of GDRs/ADRs is not subject to Indian Stamp Duty.

A transfer of GDRs is not subject to Indian Stamp Duty. However upon the acquisition of the equity shares from the Depository in exchange for GDRs, the non resident holder will be liable for Indian stamp duty at the rate of 0.25% of the market value of the GDRs or equity shares exchanged. A sale of equity shares by a non-resident holder will also be subject to the Indian stamp duty at the rate of the 0.25% of the market value of the equity shares on the trade date, although customary such tax is borne by the transferee.13

13

Researcher has taken this part from the Indian Income Tax Act 1961.

5. Conclusion
ADRs/GDRs are an excellent means of Investment for NRIs and foreign nationals waiting to invest in India. Investor by buying these, they can invest directly in Indian Companies without going through the hassle of understanding the rules and the 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. GDRs allow to investors to invest in foreign companies without worrying about foreign trading practices, laws easier trading payment of the dividend is in the GDR currency. GDRs issuance provides the company with visibility, larger and diverse shareholders base and the ability to rise more capital in international market. However ADR/GDR has foreign exchange risk also.