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ADRs Back In Fashion?

Published on Sat, Aug 08,2015 | 11:41, Updated at Mon, Aug 10 at 22:02Source : CNBC-TV18 |   Watch Video :

In 4 months, 4 Indian companies have announced ADR programs. That's more than in the last 4 years. What's prompted this sudden interest in ADRs? Why are ADRs back in fashion? CNBC TV18’s Menaka Doshi talks to Aashish Mishra, Director & Head - Securities Services, Citi India, Pratibha Jain, Partner, Nishith Desai Associates and Jason Paltrowitz, Executive VP, OTC Markets Group
It all started eight months ago, when the government announced a new depositary receipt scheme. That allowed for the first time the establishment of sponsored and unsponsored level 1 or non capital raising depositary receipts on the back on Indian securities
Aashish Mishra, Director & Head - Securities Services, Citi India

So historically in the Indian market prior to this new regulations coming out the only DRs which are permitted is what is called is level 3 or capital raising DR programs where Indian Companies had to list themselves in overseas exchanges they could raise capital bring it in back into the country. What the new rules do are enable level I or non capital raising program. Essentially it allows overseas investors to trade in Indian Companies via the secondary market using a DR mechanism.

The second key change is that under the ambit of level 1 DRs, there are two kinds of DR programs which are now allowed. One is a sponsored and the other is unsponsored program. The key difference is that in a sponsored level 1 program the company appoints one depositary bank which runs with the entire level 1 program, whereas in the case of an unsponsored program the company has no involvement and multiple depositary banks can start trading ADRs in the secondary market of the company simultaneously. So, that is the key difference between secondary and the un-secondary. That was a second change.

The third change is that the new rules allow for issuing ADRs overseas on underlying other than equity. So underlying instruments like government bonds, corporate bonds, mutual fund units they are all allowed for floating ADRs against them so that is the  third key change.


Within a month of a depositary scheme being notified global depositaries had filed to establish un-sponsored level 1 ADRs for over 160 Indian Companies.

But if an un-sponsored ADR is established by investors then a company can do a sponsored ADR only on its termination.

Aashish Mishra, Director & Head - Securities Services, Citi India

From a company point of view I wouldn’t really call it as being a cause of concern because the reality is that once this new product goes live un-sponsored programs will be a reality. So, even if the company does not want the rules will allow different banks to start doing ADRs in this secondary market without the company’s involvement. So, I wouldn’t call it a cause of alarm, there are pretty valid reasons for that. Yes, what companies can do and some of them have done is to take a strategic view on whether they want the market to lead this whole product via un-sponsored rule or whether company want to play more active role and go in for a sponsored program.

Pratibha Jain, Partner, Nishith Desai Associates

Sponsored level 1 ADR makes a lot of sense for companies that want to provide its investors the opportunity to be able to trade in the US and be able to exchange shares there. So, from a perspective of providing liquidity to its investors and increasing its visibility and as a first step in terms of getting access to US Markets sponsored level 1 ADR makes sense. With the introduction of the un-sponsored DR regime by the government it is more sensible for companies to go for sponsored ADRs and have control over it rather than being forced by the investors with an un-sponsored DR program.


That is exactly what Axis Bank, Bharti Infratel and Bharti Airtel have decided to do. In March Axis Bank said its board had approved a sponsored level 1 Depositary receipt issuance program of up to 142 million DRs with a conversion of 5 equity shares to 1 Dr.

March, 2015

Board Approves
Sponsored Level 1 Depositary Receipt  Issuance programme
Of upto 142 mn DRs
Conversion of 5 equity shares to 1 DR

March, 2015
‘..the bank had chosen to take the sponsored route so that the bank could have a more controlled programme for issue of ADRs’
-          Shikha Sharma
MD& CEO, Axis Bank  
Source: Times of India

Managing Director and CEO Shika Sharma said, “The bank had chosen to take the sponsored route so that the bank could have a more controlled program for the issue of ADRs.”

‘The purpose of this program is clearly not for raising capital…The actual purpose is to develop new investor base that is expanding the overall investor base by enhancing investor services in the US and broadening the choices of available investment instruments in US capital market. The company expects that sponsored ADR program in US for a quality company like ours will lead to greater name recognition for us across all types of American and global investors.’
-          Akhil Gupta
Chairman, Bharti Infratel

Last month Bharti Infratel approved the establishment of a sponsored level 1 ADR programs in the US. Chairman Akhil Gupta said “the purpose is clearly to for capital raising but to develop a new investor base and enhance investor service in the US, broaden the choices of available investment instruments and gain greater name recognition across global investors.” This week, Bharti Airtel’s board approved the establishment of a sponsored level 1 ADR program.

Aashish Mishra, Director & Head - Securities Services, Citi India
So the way it works is that many companies are very happy if the stock were just to be made available to overseas investors to trade once this level 1 Dr route goes live because they just want to see investor demand, they want to test the waters and just want to make sure that the stock is available. So, for companies like that the level 1 un-sponsored route is a great option because the company doesn’t have to do anything there are multiple banks. As long as there is overseas investor demand the level 1 un-sponsored route will start feeding on its own. So, it is a great route for those kinds of companies.

On the other hand there are also some companies which goes step ahead of that and say that they want to play more active role in this whole ADR level 1 structure. An active role can be in multiple things for them, one is having a level of control over the programs what is the program size and so on. The second is having a sharper and a more well defined investor relation (IR) strategy. So, these are companies for whom if there are multiple banks the investor relation strategy can become difficult to manage and they would instead want to have one single bank doing that. Finally, there would be some companies for whom eventually the goal is to convert to a full fledged level 3 ADR program.

For those kinds of companies if it inception, your ADR program starts of in a sponsored structure with this just one bank running with the entire program the final conversion to level 3 is much more simpler. So, those are some of the key reasons which companies factor in while deciding whether to go in for a sponsored program.


So now there are a slew of filings for un-sponsored ADRS and at least 3 sponsored ADRs in the works. But it is not clear when nay of them will take off because eight months after the depositary receipt scheme was notified companies and shareholders are still awaiting regulatory and tax clarifications.  

Aashish Mishra, Director & Head - Securities Services, Citi India

From a regulation point of view the industry is working with both Reserve Bank of India (RBI) and SEBI. Fundamentally the main thing is around the headroom monitoring process. So, be it a sponsored DR programs or an un-sponsored level 1, the exact mechanism by which the foreign ownership limits availability will get disseminated to the market that is what the headroom is all about and that is what we are awaiting. Then there are some operational clarifications around reporting methodology and so on and so forth but that is secondary.

Pratibha Jain, Partner, Nishith Desai Associates

With respect to tax the key concern is only around which is common for both sponsored and un-sponsored would be the fact that both transfer from un-resident to resident has a tax of about 10 percent, Capital Gains Tax. The conversion of DRs to shares currently don’t have an expressed exemptions. Our committee had highlighted these and suggested that these be clarified but it is still not being done.   


When these hurdles are overcome the sponsored and un-sponsored ADRs will list on the US OTC or over the counter market. Now the OTC market places trade over 1,600 ADRs from over 30 countries with the total trading volume hitting USD 133 billion last year.

Jason Paltrowitz, Executive VP, OTC Markets Group

Paltrowitz: OTC Markets Group actually operates all of exchange equity trading in the US. We do that through three market places, so we have our our OTCQX or what we call our best market place which is where you find many of the bluechip ADRs such as Roche and Adidas. We operate OTCQB which is a venture stage market place for early stage and developing companies and we operate the OTC Pink Market Place. That is a market place we call the Open Market Place for all types of equities whether they be distressed or bankrupt right up to many of the un-sponsored ADRs.

Doshi: As I understand it, in the case of an unsponsored ADR the issuer is not involved and doesn’t have to make any additional disclosures or register with the Securities and Exchange Commission (SEC), right?

Paltrowitz: Right, so from the legal point of view I think it was October 2008, the rule what you are referring 12g3-2(b) was changed. It was changed to allow for these un-sponsored ADRs. The rule states that so long as a company is providing the disclosure that they require to provide to their home market regulator in English on a public site, exempts them from SEC registration so long as their operations are in another country and most of their business is in that country.

So from an Indian Company perspective there is no real added risk associated with an un-sponsored ADR from an SEC perspective.  So having to be worried about whether or not they will have to be SEC registrants doesn’t really exist, so that is a good thing. What you do need to think about if you are an Indian Company is the level of control that you want to have over that vehicle, so in the un-sponsored world you can have up to 4 banks that have created an ADR program for you and you really don’t have any control from an issuer perspective over how you engage your investors and reach those investors.

So, whether it is a corporate actions processing and how that gets distributed to your US investors, how dividends get paid, the fees associated with the ADR program, all of those things in un-sponsored world you don’t have control over which is why we think it is the sponsored which is really what the Indian companies should be looking at.

Doshi: Can you give us some detail on trading volumes for sponsored as well as un-sponsored ADRs on the OTC market places and also what impact these ADRs have on home market volumes?

Paltrowitz: So, OTCQX tends to trade about four times better than OTC Pink. Now obviously that is over all type of ADR programs whether they are sponsored or un-sponsored. On the pink market place I don’t have the exact statistics, but you will find that the sponsored programs do tend to trade better than un-sponsored. Again, that is a function of the company taking ownership of the program and being then engaged with their investors. Our programs range though and a lot of that depends on investor demand. You will find a lot of un-sponsored that don’t trade at all. However, you will find some where there is significant investor interest where those programs trade more.

In the ADR world generally, 76 countries have level 1 ADR programs, you will find that the majority of the trading is always going to be in the home market. So some of the best bluechip OTCQX ADRs names like Roche, Adidas and Danone, if they can get 10-15 percent of their global trading volume in the ADR, that’s considered to be the successful ADR program.

Doshi: I do want to ask you about the profile of investors trading on the OTC Markets?

Paltrowitz: The investors that you find on the OTC Markets, whether it is OTCQX or Pink, really are the same investors you would find anywhere else. The largest holders of ADRs whether they are sponsored or un-sponsored, actually happen to be the largest holder of international equities. So, names like Fidelity and Capital and Janus actually have large portions of their international holdings in ADRs.

Doshi: Do you think that the India opportunity is a big one for OTC markets?

Paltrowitz: This is actually what, I cannot put an exact number on it, and BNY Mellon has put numbers in the billions. I certainly know that it is a big opportunity. India is a very difficult market for US investors to transact in it is costly – (A), B- it is outside of time zones and so there is always a home market bias when you come to trading. So to be able to trade in your times zone, in your currency, to have dividends and have corporate actions in a way that you understand, is really a great opportunity for Indian companies to expand their shareholder base, but also for many of the institutions that already trade in India or hold their equities to just make it more cost effective and easier for them. So, the first big opportunity is you’ll find a lot holders of Indian equities now who’ll seek to convert those positions to ADRs just to make it a little easier and to save some cost. Then what you will do is certainly you will open up India to that second and third tier  institution and the retail investor that has wanted access to the country, but really hasn’t had the wherewithal to be able to invest whether it is from a time zone or cost perspective.


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