MARKET FOR DEPOSITORY

RECEIPTS

SUBMITTED BY:
MAHIMA MAGHAN - 24102
SHIVANGI MAHAJAN- 24107
TAAJBIR KAUR- 24123
 UNDERSTANDING DEPOSITORY
RECEIPT

• A depositary receipt (DR) is a type of transferable financial security issued by a

depository bank that is traded on a local stock exchange but represents a
security, usually in the form of debt or, more often, equity that is issued by a
foreign company.
• DRs are not actual shares of stock but receipts representing shares that allow
investment in shares or bonds of other countries.
• One of the most common types of DRs is the American depositary receipt
(ADR). Since then, DRs have spread to other parts of the globe in the form of
global depositary receipts (GDRs), European DRs and international DRs. Both
ADRs and GDRs are often denominated in U.S. dollars, but can also be
denominated in euros.
 TYPES OF DR

American Depository Receipts:

• American Depository Receipts (ADRs) are a way of trading non-U.S. stocks on the
U.S. exchange. Through ADRs, Indian companies who are willing to raise funds from
the U.S. can do so by issuing shares on the American Stock exchange.
• However, the issuance of ADR is governed by the rules and regulations as laid down
by the regulator SEC (Securities and Exchange Commission). The Indian Companies
will have to maintain accounts as per the American Standards.
• The Indian companies cannot directly list their equity shares on the international stock
exchange. So in order to overcome this problem; the companies give shares to an
American bank. These American banks in return for those shares provide receipts to
the Indian companies.  The companies raise funds by providing those ADR receipts in
the American share market.
 TYPES OF ADR

All ADRs are categorized into two broad categories –

1. Sponsored ADRs:
• A sponsored ADR features a contractual relationship between a foreign private
issuer and a single depositary bank exclusively authorized to issue ADRs
representing that issuer’s shares.
• This relationship is governed by a Deposit Agreement in regards to which the
issuer, the depositary bank and the ADR holders are a party.
• The foreign company and depositary bank register the ADRs via a filing with the
Securities and Exchange Commission. Holders of sponsored ADRs have many of
the rights of ordinary shareholders, typically including the right to receive reports,
the right to vote, and the right to receive dividends. Sponsored ADRs are almost
always denominated in USD.
• In order for an ADR to trade on the New York Stock Exchange or NASDAQ, the
program must be sponsored.
 TYPES OF ADR

2. Unsponsored American Depositary Receipt (ADR):

• An ADR program in which the foreign issuer is not directly involved is
referred to as an Unsponsored ADR.
• In this type of ADR program, there is no contractual relationship between
the depositary bank and issuer. One or more depositary banks may create
and issue ADRs in response to market demand without the issuing
company’s participation.
• While ADR holders derive some of the economic benefits afforded to
ordinary share investors including payment of dividends, other rights, such
as the right to provide a voting instruction, are very limited.
 TYPES OF ADR

Further, ADRs are categorized into three levels when fulfilling the requirement to list
their shares on the stock exchange.
• Level 1: This type of ADR is usually traded on Over the counter market as this firm
does not meet the criteria to the reporting standard (US GAAP) or register with the
regulator (SEC) to get its share listed on the stock exchange. This ADR is
considered to be risky among investors.
• Level 2 & 3: The Firm must register its ADR with the regulator (SEC) & also submit
the financial reports of the firm, which should be U.S GAAP compliance. Level 2
registered ADR can’t raise funds in the market. But Level 3 ADR is considered one
of the most efficient ADRs among all levels and can raise funds for the firm. Level 3
ADR can be listed on the American stock exchange, such as NYSE or NASDAQ.
 GLOBAL DEPOSITARY RECEIPTS

• A global depositary receipt (GDR) is a negotiable financial instrument issued by a

depositary bank. It represents shares in a foreign company and trades on the local
stock exchanges in investors' countries. GDRs make it possible for a company (the
issuer) to access investors in capital markets beyond the borders of its own country.
• While shares of an international company trade as domestic shares in the country
where the company is located, global investors located elsewhere can invest in those
shares through GDRs.
• Using GDRs, companies can raise capital from investors in countries around the
world. For those investors, the GDRs will be denominated in their home country
currencies. Since GDRs are negotiable certificates, they trade in multiple markets and
can provide arbitrage opportunities to investors.
• GDRs are generally referred to as European Depositary Receipts, or EDRs, when
European investors wish to trade locally the shares of companies located outside of
Europe.
 TYPES OF GDR

There are two broad categories of GDRs –

1. Rule 144A GDRs
• These GDRs are those which operate through the rule 144A of the Securities Exchange
Commission (SEC) of the US. This rule allows non-American companies to trade and raise
capital in the American Markets.
• It also makes these GDRs a cheaper alternative to raising capital from American markets
than Level III ADRs.
2. Regulation S GDRs
• These GDRs are those which help non-American companies raise funds and establish a
trading presence in the European markets only.
• These GDRs usually trade on the London or Luxembourg Stock Exchange only and are
popularly known as Reg S GDRs. Only non-American investors can trade in Reg S GDRs.
• A company can issue both Reg S and Rule 144A GDRs, but they will be subject to different
laws.
 INDIAN DEPOSITORY RECEIPTS

• IDRs are transferable securities to be listed on Indian stock exchanges

in the form of depository receipts.
• Created by a Domestic Depository in India against the underlying equity
shares of the issuing company which incorporated outside India.
• The Securities and Exchange Board of India (SEBI), has introduced
guidelines for foreign companies to raise capital here by issuing Indian
depository receipts (IDRs). It has set a minimum size of the IDR float at
Rs 50 crore and the minimum investment limit at Rs 2 lakh per investor.
 I N D I A N D E P O S I TO RY R EC E I PT S

• Any foreign company listed in its home country and satisfying the
eligibility criteria can issue IDRs.
• Typically, companies with significant business in India, or an India focus,
may find the IDR route advantageous.
• Similarly, the foreign entities of Indian companies may find it easier to
raise money through IDs for their business requirements abroad.
 INDIAN DEPOSITORY RECEIPT -
CHARACTERISTICS

• Overseas Custodian: This is a foreign bank with branches in India that

requires clearance from the Finance Ministry to function as a custodian, as well
as registration with SEBI as an Indian depository.
• DR issue approvals: IDR issue approval will be required by SEBI, and an
application can be submitted for this purpose 90 days prior to the issue opening
date.
• Listing: These IDRs would be freely transferable and placed on Indian stock
markets.
 MAIN ACTIVITIES

• Trading of Depositary Receipts: Once depositary receipts are issued

and an adequate number of depositary receipts are outstanding in the
market, (usually 4 percent to 8 percent of the company's shares in
depositary receipt form), a true intra-market trading environment
emerges. Until this market develops, the majority of depositary receipt
purchases result in cross-border transactions where depositary receipts
are issued versus the deposit of the underlying ordinary shares. When
executing a depositary receipt trade, brokers seek to obtain the best
possible price by comparing the depositary receipt price to the
equivalent price of the ordinary shares in the home market. Brokers will
buy or sell in the market that offers them the most cost-effective
execution. They can do so in three ways: by issuing a new depositary
receipt, transferring an existing depositary receipt or cancelling a
depositary receipt.
• Issuance of Depositary Receipts: “Issuance” simply refers to the
transfer of custody of the share from the home market to the overseas
market. After the subscription period has expired, the leader
manager/underwriter makes payments for its subscription through
remittance to the issuer’s currency account (of the country of the DR
issuance). Upon confirmation of the payment for such subscription, the
issuer issues the underlying shares in the country of incorporation and
the credits the underlying shares to the Depositary’s securities account
opened with the local custodian which was appointed by the Depositary.

• Market Making Transactions: Besides the practical example of

arbitrage explained in (1), the designated sponsor/broker might as well
be involved in market making transactions. To keep a certain interest and
to avoid that the price difference between DR and original is not
becoming too big, he might be engaged to buy or sell DRs in the remote
market mainly by quoting a buy/sell price for which he would trade. This
could as well include transactions to move DRs into, respective out of the
market by conversion.
• Cancellation: "Cancellation" of the DR takes place upon reguest of the
DR Owner to cancel the DR and receive the underlying securities. When the
DR Owner sends such request to the Depositary (or the Depositary Agent),
the Depositary will cancel the DR and instructs the custodian to deliver the
underlying securities to the account of the DR Owner. To add, the DR
program must allow for the cancellation of the DR before it can take place.
Cancellation will take place when the DR Owner would like to convert the
DR to the underlying security or to make arbitrage trade. When the price of
the underlying shares in the country of incorporation is higher than that of
the depositary receipts, an investor may conduct arbitrage trading by
purchasing depositary receipts and selling the underlying shares. In such a
case, the beneficial owner of such depositary receipts may apply for
cancellation of the depositary receipts through the participant at the
Depositary. Upon receipt of the application for cancellation. the Depositary
instructs the underlying shares' custodian to deliver the corresponding
number of underlying shares to the investor's custodian, which is usually
located in the country or incorporation.
 CASE STUDY

Alibaba Group Holding Limited, also known as Alibaba, is a Chinese

multinational technology company specializing in e-commerce, retail,
Internet, and technology.

In 2014, Alibaba Group made headlines when it launched its initial public
offering (IPO) on the New York Stock Exchange. As a Chinese company,
Alibaba faced challenges in raising capital from American investors due to
regulatory and currency exchange issues.

To overcome these challenges, Alibaba decided to issue American

Depositary Shares (ADS), which are similar to ADRs. Each ADS
represented one ordinary share of Alibaba. The ADS were issued by a
depositary bank in the United States, making it easier for American
investors to invest in Alibaba without having to deal with currency
exchange and regulatory issues.
 CASE STUDY

• Alibaba raised a record-breaking $25 billion in its IPO, making it the largest IPO in history at
the time. The success of Alibaba's ADS issuance demonstrated the benefits of using ADRs
to tap into foreign markets and raise capital from foreign investors.

• However, Alibaba also issued Global Depositary Receipts (GDRs) in the same year. The
GDRs were listed on the Hong Kong Stock Exchange and denominated in Hong Kong
dollars. The GDRs were primarily targeted at Asian investors, particularly those in Hong
Kong and mainland China.

• The issuance of both ADS and GDRs allowed Alibaba to raise capital from both American
and Asian investors, while also addressing currency exchange and regulatory issues. This
dual approach to raising capital through ADRs and GDRs demonstrated the flexibility and
versatility of using these depositary receipts in capital raising efforts.

• In conclusion, Alibaba's use of ADRs and GDRs in its IPO allowed the company to overcome
currency exchange and regulatory issues and tap into a wide pool of foreign investors. The
success of Alibaba's IPO demonstrated the importance of understanding and utilizing
depositary receipts when raising capital from foreign markets.