Page 255 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes Each of the depository receipts represents a specified number of shares in the domestic markets
usually in countries with Capital account convertibility, the GDRs and domestic shares are
convertible (may be redeemed) mutually. This implies that, an equity shareholder may deposit
the specified number of shares and obtain the GDR and vice versa. The holder of the GDR is
entitled to a dividend in the value of the underlying shares of the GDR (issued normally in the
currency of the investor country).

As far as Indian companies are concerned, dividends are announced as a percentage of the value
of GDR same premium in rupees term converted at the prevailing exchange rate.
However until the GDR/ADR/IDR’s are converted, the holder cannot claim voting rights and
also there is no foreign exchange risk for the company. The company will be listed at the preferred
stock exchanges providing liquidity for the investment.

Global Depository receipts

The advent of GDRs in India has been mainly due to the balance payments crisis in the early 90s.
At that time India did not have enough foreign exchange balance even to meet the requirements
of fortnight imports. International institutions were not willing to lend because of non-investment
credit rating of India. Out of compulsions, rather than choice, the government (accepting the
World Bank suggestions on tiding over the financial predicament) gave permission to allow
fundamentally strong private corporate to raise funds in international capital markets through
equity or equity related instruments. The Foreign Exchange Regulation Act (FERA) was modified
to facilitate investment by foreign investors up to 51% of the equity capital of the companies.
Investments even beyond this limit are also being permitted by the government on a case to case
basis.

Prior to this, companies in need of the foreign exchange component or resources for their
projects had to rely on the government of India or partly on the government and partly on the
financial institutions. These foreign currency loans utilised by the companies (whether through
the financial institutions or through the government agency) were paid from the government
allocation from the IMF, World Bank or other Governments credits. This in turn, created liability
for the remittance of interest and principal, in foreign currencies which was to be met by way of
earning through exports and other grants received by the government. However, with a rapid
deterioration in the foreign exchange reserves consequent to the Gulf war and its subsequent
oil crisis, companies were asked to get their own foreign currencies which led to the advent of
GDRs.

instrument

As mentioned earlier, GDRs are essentially those instruments which possess a certain number of
underlying shares in the custodial domestic bank of the company. That is, a GDR is a negotiable
instrument which represents publicly traded local-currency-equity share. By law, a GDR is any
instrument in the form of a depository receipt or certificate created by the Overseas Depository
Bank outside India and issued to non-resident investors against the issue of ordinary shares or
foreign currency convertible bonds of the issuing company. Usually a typical GDR is denominated
in US dollars whereas the underlying shares would be denominated in the local currency of the
issuer. GDRs may be at the request of the investors-converted into equity shares by cancellation
of GDRs through the intermediation of the depository and the selling of underlying shares in the
domestic market through the local custodian.
GDRs, per se, are considered common equity of the issuing company and are entitled to dividends
and voting rights since the date of their issuance. The company effectively transacts with only
one entity – the overseas depository – for all the transactions. The voting rights of the shares are
exercised by the depository as per the understanding between the issuing company and the GDR
holders.

250 lovely Professional university