Definition of Global Depository Receipts (GDRS)

Global Depository Receipts (GDRS)

GDRs are traded and settled outside the US. However, the SEC permits the foreign companies to offer their GDRs to certain institutional buyers. The Government of India contemplated in 1991 to permit Indian companies to issue equity and equity related instruments in the form of GDRs and convertible bonds. A detailed notification was form of GDRs and convertible bonds. A detailed notification was issued in November 12, 1993 outlining the scheme for the issue of GDRs and foreign currency convertible bonds. The scheme came into force effective from April 1, 1992. In terms of guidelines issued by the Union Ministry of Finance in November 1993, Indian companies have been permitted to raise foreign currency resources through the issue of foreign currency convertible bonds (FCCBs) and equity shares under the global depository receipt (GDR) mechanism to foreign investors, both individual and institutional investors.

A Global Depository Receipt is a dollar denominated instrument traded on a stock exchange in Europe or the US or Both. Each GDR represents a certain number of underlying equity shares. Though GDRs are quoted and traded in dollar terms the underlying equity shares are denominated in rupees.

An Indian company issues the shares to an intermediary called the depository (a Euro bank) in whose name the shares are registered. It is the depository, which subsequently issues the GDRs. The physical possession of equity shares is with another intermediary called the custodian, which is the agent of the depository. Thus while a GDR represents issuing companies shares it does have a distinct identity. In fact it does not figure in the book of the issuer.

For Explanatory purpose, we may cite the case of reliance industries ltd,. Which was the first Indian company to make GDR issue in May 1992? Each GDR represent two shares of RIL. The issue price of each GDR was fixed at $16.35 equal to ` 245 per share. The GDR can be traded worldwide in all the stock exchanges.

The FCCB and GDRs may be denominated in any freely convertible currency. However, the ordinary shares underlying the GDR and the shares issued upon conversion of the FCCBs will be denominated only in Indian currency. The GDRs issued under the scheme may be listed on the overseas stock exchanges or over the encounter exchange or through book entry transfer systems prevalent abroad and receipt may be purchased, possessed and freely transferred by a person who is a non-resident. With the adoption of liberalization policies by the Indian Government in June 1991, Indian corporate sector started launching big projects. There has been an around expansion in the industrial sector. In many cases the project sizes are such the required finance cannot be raised in the Indian capital market. The companies had to tap off-shore funds. Further more; the interest rates prevailing in Euromarkets are comparatively lower, leading to saving in interest costs. Some companies have taken recourse to euro-issues to repay the Indian currency debt to improve their profitability. In the case of convertible bonds the shares can be issued at a premium at the time of conversion. This would lessen the cost of capital to the company. These schemes become possible because of a major development in international capital markets in recent years- increasing interest among international investors in emerging markets. A few east European countries in Asia and Latin America follow the major emerging markets. India has been identified as an important emerging market on account of the large size of its economy, its active capital market as well as its recent effort at globalization.

Guidelines for Euro-Issues

The Government of Indian notified on November 12, 1993 a scheme for facilitating the issue of foreign currency convertible bonds (FCCBs) and ordinary shares through GDR mechanism. According to the above notification, the scheme came into force on April 1, 1992.

The Eligibility Criteria under the Scheme are

A company involved in priority sector industries, which wants to issue FCCBs or equity shares through GDR, is requires to obtain prior permission of the department of economic Affairs, Ministry of Finance. In other cases the companies well need to obtain the permission of foreign Investment Promotion Board clearance. An issuing company shall have a consistent track record of good performance for a minimum period of 3 years. On this basis only the dept. of economic affairs gives the approval for finalizing the issue structure.

On the completion of finalization of issue structure in consultation with the lead manger to the issue, the company shall obtain final approval form the dept. of economic affairs to proceed ahead with the issue.

The other salient features of the guidelines are: (i) the aggregate foreign investment made either directly or indirectly through GDR mechanism shall not exceed 51% of the issued and subscribed capital of the company. Ordinary shares and FCCBs issued against GDRs shall be treated as foreign direct investments.

The above guidelines were modified on May 1994. They were revised again in June 1996.

There will be no restriction on the number of euro issues made by a company in a year. In the previous guidelines, one company could make at most one euro issue in a year.

The pre-requisite of having a minimum track record of profitability of three years has been relaxed for companies engaged in infrastructural industries such as power generation, telecommunications, petroleum refining, port, roads and airports. Companies engaged in other industries will have to satisfy the three year track record of profitability as earlier.

Bank financial institutions and non-banking finance companies registered with the RBI will be allowed access to the euro issue market.

The Government has allowed 25%of the GDR or FCCs capital requirements as against 15% earlier. The other approved end-use methods remain, namely, financing capital goods imports, financing domestic purchases of plant, equipment and buildings, prepayment or scheduled repayment of earlier external borrowing and making investment abroad where these have been approved by competent authorities.

The deployment of euro issue proceeds in the stock market or in real estate has been banned.