ADR or ADS
What is an ADR or ADS?
A significant portion of public offerings by non-US companies (and here we are more
concerned with Indian companies) in the US are in the form of ADRs or American Depository Receipts (also called American Depository Shares or ADS). ADRs are negotiable receipts issued to investors by an authorised depository, normally a US bank or depository, in lieu of shares of the foreign company which are actually held by the depository. ADRs can be listed and traded in a US-based stock exchange and they help the Indian company to be known in the highly liquid US stock exchanges. ADRs also help the US-based and other foreign investors to have the twin benefits of
having a shareholding in a high growth Indian company and the convenience of trading in a highly liquid and well-known stock market. As you probably know, two Indian companies, Infosys and ICICI, have gone in for ADRs.
Why do companies go through the depository route?
Indian companies are prohibited by law from listing rupee-denominated shares directly in foreign stock markets. Therefore, they issue such shares to a depository which has an office within India. These shares remain in India with a custodian. Against the underlying shares, the depository issues dollar-denominated receipts to foreign investors. Foreign investors can then sell these receipts in the foreign stock exchanges or back to the depository and get delivery of the underlying rupee denominated shares which can then be sold in the Indian markets. This is generally done if institutional investors with a presence in both India and the US see an arbitrage opportunity arising out of a difference in prices on the US and Indian exchanges.
How are ADRs different from GDRs?
ADRs are listed on an American stock exchange. The issue process is governed by American laws and Securities and Exchange Commission (SEC), the market regulator, monitors the issue. GDRs or global depository receipts are listed in a stock exchange other than American stock exchanges, say, Luxembourg or London. A listing in America involves adhering to very stringent disclosure and accounting norms. The accounts of the company have to be represented according to US GAAP or generally accepted accounting principles. US GAAP requires representing a combined balance sheet of all group companies, and not just the company which is going for the issue. Typically, a good company can expect its reported profits according to Indian accounting rules to be eroded by 20-30 per cent under US GAAP. Against this, the disclosure requirements for GDR issues are widely thought to be less stringent. An ADR listing also allows the famed American retail investors to partake in the offering and leads to wider interest and better valuations of a company’s stock, thus enhancing shareholder value. Also, the Indian company can acquire US companies against issue of shares. The GDR market is mainly an institutional market with lower liquidity.
What are the characteristics of an ADR?
ADRs are quoted in US dollars and are generally structured so that the number of the
foreign company’s securities will result in a trading price for each ADR in the range of
$10-30. The multiple or fraction that an ADR is of the underlying shares is determined with this price range in mind. The depository receives dividends directly from the Indian company in rupees and issues dividend cheques to ADR holders in dollars. When an ADR is sold back to the depository, it is considered as cancelled and the stock of ADRs is not replenished.
How is an ADR issue done?
The company must get its group accounts consolidated and audited according to US GAAP by an independent agency. It also has to appoint a team of legal and compliance experts as well as lead managers and investment bankers to the issue. The teams will then have to prepare the draft prospectus or the registration statement which will be submitted to SEC. SEC reverts with its comments and requirements, and this goes on till SEC is sufficiently satisfied with the information given. Now the draft prospectus is ready to be distributed to prospective investors. Simultaneously, the company will also have to start the application process to list with the particular stock exchange. With the draft prospectus ready, the company can launch its road shows or the selling exercise for getting subscription to the issue. Prospective investors give their price and amount indications to the lead managers to the issue. Based on investor response, the lead managers fix the price of the issue, which is intimated to the SEC and the concerned stock exchange. With their concurrence, the issue is listed.