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What is ECB?
Source of funds for corporate from abroad with advantage of lower rates of interest prevailing in the international financial markets longer maturity period for financing expansion of existing capacity as well as for fresh investment Defined as to include commercial loans [in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, CP)] availed from non-resident lenders with minimum average maturity of 3 years
Basically ECB suggests any kind of funding other than Equity (considered foreign direct investment) be it Bonds, Credit notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature, satisfying the forms of the ECB regulations.
Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds External assistance, NRI deposits, short-term credit and Rupee debt Non convertible or optionally convertible or partially convertible debentures Redeemable preference shares are considered as part of ECBs As per Indian corporate law, all preference shares are mandatorily redeemable unless they are convertible. Hence, convertible preference shares will not be ECB (will be Foreign Direct Investment) Non convertible, partly convertible or optionally convertible preference shares are treated as ECBs Bonds, Credit notes, Asset Backed Securities, Mortgage Backed securities
These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debtfinancing costs.
Depositary receipts (DRs) are certificates that represent an ownership interest in the ordinary shares of stock of a company, but that are marketed outside of the companys home country to increase its visibility in the world market and to access a greater amount of investment capital in other countries. Depositary receipts are structured to resemble typical stocks on the exchanges that they trade so that foreigners can buy an interest in the company without worrying about differences in currency, accounting practices, or language barriers, or be concerned about the other risks in investing in foreign stock directly.
Background Historically, American Depositary Receipts (ADRs) were the first type of depositary receipt to evolve. They were introduced in 1927 in response to a law passed in Britain, which prohibited British companies from registering shares overseas without a British-based transfer agent. UK shares were not allowed physically to leave the UK, and so, to accommodate US investor demand, a US instrument had to be created; this was called an American Depositary Receipt.
They are typically formed by a depository bank depositing ordinary shares of a foreign company into a trust and issuing receipts of interest in the underlying shares on a domestic exchange. The bank will act as a custodian for the trust handling dividend distribution, currency exchange, proxies, tax reporting, and regulatory filings. It receives a management fee for these services, either from the shareholders or the issuing company.
Trading of ADRs occurs by brokers purchasing/selling outstanding ADRs in the domestic market, or on the foreign markets if no shares are available domestically. In the case of purchases in the foreign market, the broker then deposits the foreign shares with the bank in exchange for newly created ADRs. In the case of sales in the local market, the broker will cancel the ADR causing the depository bank to sell the shares in the foreign market and deliver the proceeds in the investors currency.
Units in the trust are listed on large exchanges primarily in countries with developed capital markets, as if they were shares of a company domiciled in the same country as the exchange. The listing company of the ADR must adhere to the same regulatory requirements and disclosures as the other listed issuers on the exchange. In effect, shares of a foreign company can be purchased on a U.S. stock exchange in the same manner as stock of a U.S. company.
Units in the trust are listed on large exchanges primarily in countries with developed capital markets, as if they were shares of a company domiciled in the same country as the exchange. The listing company of the ADR must adhere to the same regulatory requirements and disclosures as the other listed issuers on the exchange. In effect, shares of a foreign company can be purchased on a U.S. stock exchange in the same manner as stock of a U.S. company.
Currency exchanges will also have to be utilized in order to purchase ordinary shares of foreign companies. ADRs trade easily and pay dividends in U.S. dollars and settle through U.S. clearinghouses. These implementation barriers coupled with the desire of investors to diversify internationally created a market for underwriters of ADR trusts. There are also Global Depository Receipts (GDRs), International Depository Receipts (IDRs), and European Depository Receipts (EDRs), which accomplish the same benefits already stated but trade in one or more internationalmarkets.
Another advantage offered by an ADR is that if the foreign stock does pay dividends, the investment bank will convert the dividends to U.S. dollars and remit the payment to you. In addition, if the dividend is subject to foreign tax, the investment bank will withhold the tax so you dont have to worry about it
Advantages to Investors
Offers a convenient means of holding foreign shares Simplifies the trading & settlement of foreign securities; ADRs trade and settle just like U.S. securities Offers lower trading & custody costs when compared with shares bought directly in the foreign market
Financial information, including annual reports and proxies are delivered to US holders on a consistent basis by the Depositary. The dividends are converted into dollars and paid to ADR holders by the Depositary.
There are several types of ADR, each of which involves a different level of disclosure of information and compliance with the regulations of the SEC. But perhaps the most important distinction for issuers of ADRs is that some structures allow the company to raise capital in the US, while others simply provide a mechanism which makes it easy for US investors to buy and trade existing shares.
TYPES of ADR :
Unsponsored ADR Sponsored ADR Level 1 Level 2 Level 3
Unsponsored ADR
An American depositary receipt (ADR) issued by a depositary bank without the involvement or participation or even the consent - of the foreign issuer whose stock underlies the ADR. The issuer therefore has no control over an unsponsored ADR, in contrast to a sponsored ADR where it retains control. Unsponsored ADRs are usually established by depositary banks in response to investor demand. Shareholder benefits and voting rights may not be extended to the holders of these particular securities. Unsponsored ADRs generally trade over-the-counter (OTC) rather than on United States exchanges.
Sponsored ADR
An American depositary receipt (ADR) that is issued in co-operation with the underlying foreign company whose equity shares will underly the ADR shares. With the corporation's sponsorship, the ADRs created in the issue usually afford their owners the same rights normally given to stockholders, such as voting rights. There are three types of Sponsored ADRs
Level 1 Level 2 Level 3
Types of ADRs
Sponsored ADR
Issued with the cooperation of the Issued
Unsponsored ADR
by broker/dealer
without
or
the
bank
No Regulatory Reporting.
Listing
on
international
Exchanges allowed.
Level I
A Level I sponsored ADR program is the easiest and least expensive means for a company to provide for issuance of its shares in ADR form in the US. Level I program involves the filing of an F-6 registration statement, but allows for exemption from full SEC reporting requirements. The issuer has a certain amount of control over the ADRs issued under a sponsored Level I program, since a depositary agreement is executed between the issuer and one selected depositary bank. Level I ADRs can however only be traded over - the-counter and cannot be listed on a national exchange in the US.
Level II
A sponsored Level II ADR must comply with the SEC's full registration and reporting requirements. In addition to filing an F-6 registration statement, the issuer is also required to file SEC Form 20-F and to comply with the SEC's other disclosure rules, including submission of its annual report which must be prepared in accordance with US Generally Accepted Accounting Principles (GAAP).
Registration allows the issuer to list its ADRs on one of the three major national stock exchanges, namely the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), or the National Association of Securities Dealers Automated Quotation (NASDAQ) Stock Market, each of which has reporting and disclosure requirements. Level II sponsored programs are initiated by nonUS companies to give US investors access to their stock in the US. As with a Level I program, a depositary agreement is signed between the issuer and a depositary bank.
Level III
Level III sponsored ADRs are similar to Level II ADRs in that the issuer initiates the program, deals with one depositary bank, lists on one of the major US exchanges, and files Form F-6 and 20-F registration statements with the SEC. The major difference is that a Level III program allows the issuer to raise capital through a public offering of ADRs in the US and this requires the issuer to submit a Form F-1 to the SEC.
Level I
Description
Level II
more
Level III
active Issuer floats a public
trading, and greater offering of ADRs in liquidity the US to raise capital the U.S. One of the U.S.
Trading
One
of
securities
exchanges securities
exchanges
or NASDAQ
or NASDAQ
Regulations Disclosures
& Minimal
SEC Registration,
Registration,
file
registration,
requirements
The GDRs are issued in the currency of the country where the stock is trading. For example, a Indian company might offer GDRs priced in pounds in London and in yen in Tokyo. Individual investors in the countries where the GDRs are issued buy them to diversify into international markets. GDRs let you do this without having to deal with currency conversion and other complications of overseas investing. The objective of a GDR is to enable investors in developed markets, who would not necessarily feel happy buying emerging market securities directly in the securities home market, to gain economic exposure to the intended company and, indeed, the overall emerging economy using the procedures with which they are familiar.
GDRs are securities available in one or more markets outside the companys home country. The basic advantage of the GDRs, compared to the ADRs, is that they allow the issuer to raise capital on two or more markets imultaneously, which increases his shareholder base. They gained popularity also due to the flexibility of their structure.
A GDR is similar to an ADR, but is a depositary receipt sold outside of the United States and outside of the home country of the issuing company. Most GDRs are, regardless of the geographic market, denominated in United States dollars, although some trade in Euros or British sterling. There are more than 900 GDRs listed on exchanges worldwide, with more than 2,100 issuers from 80 countries.
PRICING OF ADR/GDR
The pricing of ADR / GDR issues should be made at a price not less than the higher of the following two averages: (i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; (ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.
Continued
Forward fungibility Reverse fungibility No specific permission of RBI is required for re-conversion SEBI registered brokers will be able to act as intermediaries in the two-way fungibility of ADRs/GDRs. Custodians monitor the re-issuance of ADR/GDRs
CASE STUDY
Details of DR issue
Offer Price of DR: USD 49/DR (USD 98/domestic share) Offer Date of DR: July 30, 2003 Number of DRs sold: 6 million (equal to 3 million domestic shares) Issue Size: USD 294 million Issue cost: USD 11.7 million (about 4% of Issue Size) Net Proceeds to tendering domestic shareholder: USD 94.1/domestic share (Rs. 4347)
Details (contd)
Global Book Runners
Citigroup
Deutsche Bank Securities Goldman Sachs (Asia) L.L.C.
Process of Issue
File offer documents with SEC Get comments from the SEC, if any and complete the Registration Statement filing and process Create an escrow mechanism for shareholders to deposit their shares in India Send the letter of invitation to all the shareholders in India Fix a specified date to identify eligibility of shareholders who can participate in this secondary offering
Process (contd)
Road show to market the ADRs Price the ADRs Eligibility is pro-rata to the holdings of the shareholders Excess shares offered in the escrow account will be returned to the shareholders The proceeds are repatriated to India and will be distributed to the shareholders, net of issue expenses
Schedule of Issue