American Depositary Receipt or ADR is an instrument through which non-US companies can raise capital from the US capital

markets and get listed on the American stock exchanges. From the perspective of non-US companies, ADRs help them to access the investor base in the worlds wealthiest country. For American investors, it provides a way to profit from the growth of companies in foreign countries directly. ADRs are not ordinary shares of a company. An ADR may contain one or more shares of the company which issued it. An ADR can be defined as a negotiable certificate that usually represents a company's publicly traded equity or debt. The process of issuing ADRs work like this: a broker in the home market of the company which is going to issue ADRs will purchase the shares of the company and deliver them to the local custodian bank. The custodian will instruct a depository bank to issue Depository Receipts. Bank of New York Mellon and JP Morgan are examples to such banks. After their issuance, ADRs can be traded like other securities on a stock exchange or in the over-the-counter market. Benefits of ADRs For non-U.S. companies: They can access more diversified investor base through ADRs. In addition, they can raise large amount of capital which may not be possible in the home country due to the lack of large investor base. For non-U.S. firms overseas listing through ADRs also provide more global visibility and image enhancement. For U.S. investors: ADRs can help investors in the U.S. to more diversify their international investment portfolios without facing the difficulties such as costly currency conversions, unfamiliar market practices and different tax structure if invested in other countrys markets directly. Since ADRs are denominated in Dollars and pay dividends in Dollars analysis of investment is easy. Global custodian safekeeping charges can be also avoided when investing in foreign company shares through ADRs. Moreover, they can trade ADRs just like stocks of the U.S. companies with same trade, clearance and settlement procedures. Types of ADRs Mainly there are two types of ADRs - sponsored ADRs and unsponsored ADRs. Sponsored ADRs are issued by one depository by the company under a Deposit Agreement or service contract. But unsponsored ADRs are issued by one or more depositories without having an agreement with the issuing company. Most ADR issues are carried out toady are as Sponsored ADRs. Sponsored ADRs are again classified into three types. They are Sponsored Level I Depositary Receipts, Sponsored Level II Depositary Receipts and Sponsored Level III Depositary Receipts.

The first type is the simplest in formalities and will be traded on the U.S. over-thecounter market and on some exchanges outside the United States. The companies issuing Sponsored Level I Depositary Receipts need not to report their financial statements in U.S. Generally Accepted Accounting Principles or GAAP. If the issuing company wants to list their ADRs on premier U.S. stock exchanges like the NYSE and the NASDAQ, they have to use Sponsored Level II Depositary Receipts or Sponsored Level III Depositary Receipts. Such companies need to register with the Securities and Exchange Commission and have to report their financial statements in U.S. GAAP. The companies must also have to comply with the listing requirements of the stock exchanges they select to list their ADRs. ADRs Vs GDRs GDRs are depository receipts that are available in more than one market. It can be used to raise capital from two or more markets simultaneously. Following issuance, they can be listed on multiple stock exchanges. Like ADR, GDR also may contain one or more shares of the underlying company. GDR holders also have the similar rights of ADR holders. Indian Companies with ADRs The first India-registered company that issued ADRs was Infosys Technologies in 1999. Through the issuance, the company got listed on the NASDAQ stock exchange. After Infosys, many companies including Wipro, Satyam Computers, Dr.Reddy Labs, HDFC bank, ICICI bank and Sterlite Industries used ADRs to raise funds from the U.S. market. GDRs were used by Indian companies even before using ADRs. Reliance Industries was the first company which issued GDRs in 1992. In 1997, Videsh Sanchar Nigam, Ltd (VSNL) and Mahanagar Telephone Nigam Ltd (MTNL) offered GDRs to global investors. Nowadays, ADR is the most popular route used by Indian companies to raise funds from foreign investors.

I wrote about the Standard Chartered IDR yesterday, and I thought Id supplement that post with a little more detail about IDRs, since this is the first IDR ever, and there will probably be many more to come in the future.

What is an IDR? IDR stands for Indian Depository Receipts, and Standard Chartered is the first company to come out with an IDR. StanChart derived 12% of its income from India in 2009, and India contributed $1.06 billion of its $7.23 billion operating profit last year, and that may have something to do with this first. An Indian Depository Receipt is a way for a foreign company to raise money in India. The foreign company deposits its shares with a custodian, and then the custodian issues depository receipts based on these shares. To that extent, IDRs are derivative instruments because they derive their value from the underlying shares. In this case, Standard Chartered Bank, Mumbai is the domestic depository, and it has appointed Bank of New York, Mellon as its overseas depository. Dividends related to IDR For this particular issue, 1 IDR stands for one-tenth of a share, and any dividend declared by Stan Chart will be apportioned according to your IDR holdings, and distributed to you by the depository. The same is true for Rights issues also. If Stan Chart announces a rights issue, you will have rights, similar to stocks, and there will be a price set in Indian rupees that you can pay to get into such issues. If you are interested, then you have voting rights too, but there is no such thing as a tenth of a vote, ten IDRs will count towards one vote, 20 as two, and so on and so forth. Taxation related to IDR This is an interesting aspect because as I understand it, the current tax provisions put IDRs at a distinct disadvantage when compared with other common stocks. For starters, dividend tax will be assessed at 30% (plus 10% surcharge) on all the dividends you get from these IDRs. Investors dont need to pay any dividend taxes on other common stocks in India. The dividend taxes are paid by the company itself, and then the investor doesnt have to pay any tax on it. Next up, short term capital gains. On Indian stocks, the short term capital gains is charged at 15% plus surcharge, however in the case of IDRs, the short term capital gains will be charged at 30%. Similarly, there are no long term capital gains on stocks in India, but in the case of IDRs investors will need to pay a 20% long term capital gains plus 3% surcharge on IDRs. That is a pretty significant hit right there, when compared with other stocks. There is one important point relating to these taxes, and that is the Direct Tax Code, which is expected

to be implemented next year. That will change a lot of things, and by the time you think about selling these IDRs, the tax situation might look completely different. The other thing about this is that these IDRs will not attract any Securities Transaction Tax (STT), which is a good thing, but my guess is that it isnt that big a deal. If someone has a different understanding, is an expert in this area, or just has an opinion Id love to hear your views about the tax implication on IDRs. Listing gains related to IDR This is another interesting aspect related to IDRs. The way they are being sold is quite similar to an IPO, and most Indian investors interested in IPOs are looking to cash out in the first few days of listing, and hope that the IPO lists at a significant premium to the issue price. I dont think this is going to be the case for IDRs because the company already has stock trading in other markets (in Stan Charts case UK and Hong Kong), and there are players like hedge funds who will arbitrage on the price difference in the various markets and make sure the IDR doesnt run away in price. Unless something happens that influence the stock price between the issue time and listing time, there may not be much in the way of listing gains. So, there you have it, a summary of the important points of IDRs. For now, I think the tax implication is the most important when thinking about investing in IDRs, but that will probably change in the next few months with the Direct Tax Code kicks in, and the playing field levels out.