Analysis of Relationship of Adr and GDR Prices With The National and International Market

SAMZODHANA SAMZODHANA SAMZODHANA SAMZODHANA Journal of Management Research Journal of Management Research Journal of Management Research Journal of Management
gement Research
Vol 2 Vol 2 Vol 2 Vol 2, ,, , I II Issue 1 ssue 1 ssue 1 ssue 1 March March March March 2014 2014 2014 2014
www.eecmbajournal.in www.eecmbajournal.in www.eecmbajournal.in www.eecmbajournal.in

114
ANALYSIS OF RELATIONSHIP OF ADR AND GDR PRICES WITH THE
NATIONAL AND INTERNATIONAL MARKET
Sharmistha Ghosh, Assistant Professor
Department of Commerce, Shri Shikshayatan College, Kolkata

Abstract
The capital market of a country holds great significance with respect to its economic growth.
Capital markets in India as well as across the globe are progressively getting interconnected.
The new financial instrument for tapping the international markets may be termed as
Depository Receipts (DRs). A depositary receipt is a negotiable financial instrument issued by a
bank to represent a foreign company's publicly traded securities. It is a type of negotiable
(transferable) financial security that is traded on a local stock exchange but represents a
security, usually in the form of equity that is issued by a foreign publicly listed company.
Recently, Depository Receipts, especially, American Depository Receipts (ADR) and Global
Depository Receipts (GDR) have become a popular investment alternative for the investors in
India. ADR were first issued in 1927 and they account for the maximum number of trades in
comparison to GDRs. Both ADRs and GDRs help investors looking to tap a new investor base,
expand awareness, or raise capital. In this context, this paper aims at discussing the role of ADR
and GDRs issuance. It also showcases the different aspects of Depository Receipt issues along
with their relationship with the Indian and International securities market.
Key Words: Depository Receipts, American Depository Receipt, Global Depository Receipt,
Foreign Direct Investment, Regulation S.
Introduction
As the country grows and expands with the globalization of the economy, one important aspect
with regard to the investment opportunities available to investors is the introduction of
Depository Receipts (DRs) as an investment alternative. A DR is a tradable instrument that
represents an ownership interest in securities of a foreign issuer typically trading outside its
SAMZODHANA SAMZODHANA SAMZODHANA SAMZODHANA Journal of Management Research Journal of Management Research Journal of Management Research Journal of Management Research

115
home market. Most common types of Depository Receipts are the American Depository
Receipts (ADRs) and Global Depository Receipts (GDRs). ADRs are issued by the United States
(US) in lieu of a non-US companys shares which are traded on the US exchange although the
companies itself are not listed on the US exchange. The DRs which are not listed on US
exchange but in other countrys exchanges most commonly in London or Luxembourg are
termed as Global depository Receipts (GDRs). A depositary receipt where the issuing bank is
European will sometimes be called a European Depositary Receipt (EDR). While by creating a
depositary receipts program, the companies are able to gain the flexibility and access they need
to achieve the companys strategic goals it also hold special appeal for investors because they
make investing in a company beyond the investors home borders easy and convenient. This
attribute fuels investor appetite, which in turn has driven explosive growth in the depositary
receipt market. So, from an investors point of view the ADR or GDR is essentially a certificate
issued by a bank that gives the owner rights over a foreign share. It can be listed on a stock
exchange and bought and sold just like a normal share. The holder of an ADR or GDR is entitled
to all benefits such as dividends and rights issues from the underlying shares but they are
sometimes though not always able to vote. Initially, most of the issues were done through
private placement route during the 1990s but afterwards the exchange traded ADRs were
introduced. In this respect this paper is organized as follows. Section 2 gives an overview of
depository receipts and their benefits. Section 3 draws an analysis of ADR and GDR prices and
studies their relation with the different market indices. Section 4 states the regulations
regarding ADR GDR issue and divestment of shares in India. And finally the last section is
devoted to conclusion and recommendations.
Overview of Depository Receipts
While depositary receipt (DR) programs can be structured in a variety of ways, there are two
basic options: American Depositary Receipt (ADR) programs, which give companies access to
the US capital markets, and Global Depositary Receipt (GDR) programs, which provide exposure
to the global markets outside the issuers home market and the institutional investor market in
the US.

116
Types of ADRs
Unsponsored Sponsored
Level I
Private placement
Level II
Level III
American Depository Receipts
American Depositary Receipts (ADRs) offer the issuing company access to the worlds largest
and most active capital market. Correspondingly, ADRs provide investors in the US with a
convenient way to directly invest in international companies while avoiding the risks
traditionally associated with securities held in other countries. ADRs are dollar-denominated
securities that trade, clear and settle like any other US security. Whether traded over-the-
counter or on one of the major US exchanges, ADRs are a mainstream and popular option for
investors. ADRs may be classified broadly into two: Unsponsored ADR and Sponsored ADR.
Sponsored ADR may be reclassified as Level I, Level II and Level III and the Private Placement
under Rule 144A (Fig: 1). The Unsponsored ADR program is one in which there is no deposit
agreement set up between a depositary bank and an issuer client. One or more depositary
banks create and issue ADRs due to market demand even without the issuing companys
participation.
FIGURE: 1
DIFFERENT CATEGORIES OF ADR

Hence they are not required to be listed on any exchange. They are exempted from reporting
requirements of the SEC. The Sponsored ADRs are initiated by the issuer and it is established
jointly by an issuer and Depository. The Depository helps to provide shareholders
communication and other information to the ADR holders and it is through the Depository that
the ADR holders may exercise their voting rights. Under the Sponsored category, a Level I ADR
program is not listed on a stock exchange, but is available for retail investors to purchase and

117
trade in the over-the-counter market via NASDAQs Pink Sheets. A Level I program does not
create new capital in the US; rather, it gives the company an opportunity to develop or expand
its shareholder base by establishing a foothold in the US market. It maintains home market
accounting and disclosure standards. They use existing shares to satisfy investor demand and
liquidity. New DRs are created by issuing and canceling ordinary shares in the issuers home
market. These Level I ADRs are registered with the US Securities and Exchange Commission. A
Level II ADR uses existing shares to satisfy investor demand and liquidity. New ADRs are created
from deposits of ordinary shares in the issuers home market. Because these securities are
listed or quoted on a major US exchange, Level II ADRs reach a broader universe of potential
shareholders and gain increased visibility through reporting in the financial media. These are
more expensive than the Level I ADRs. Listed securities can be promoted and advertised, and
may be covered by analysts and the media. In addition, listed securities can be used to
structure incentives for an issuers US employees, or could be used to facilitate US mergers and
acquisitions. Level III ADRs are a public offering of new shares into the US markets. These
capital raisings have a high profile and are most expensive. They are followed closely by the
financial press and other media, often generating significant visibility for the issuer. Apart from
all these, the Rule 144A ADR is the unique one. It is the quickest, easiest, and most cost-
effective way to raise capital in the United States. New, restricted shares are created and then
privately placed with institutional investors. Rule 144A facilitates the resale of privately placed
securities to Qualified Institutional Buyers (QIBs) in the US. These do not need to conform to
the full SEC reporting and registration requirements.
Global Depository Receipts
The typical GDR structure offers DRs in Europe or other non-US markets pursuant to Regulation
S (Reg. S) promulgated under the US Securities Act of 1933. The predominant listing venues for
Reg. S GDRs are the London and Luxembourg Stock Exchanges, with GDRs having also been
listed on the Singapore Exchange, Frankfurt Stock Exchange and Nasdaq Dubai. Rule 144A GDRs
trade in the U.S. over-the-counter market. When GDRs are offered simultaneously in Reg. S and
Rule 144A form, but in separate and distinct tranches, they exist inside what is known as a

118
bifurcated GDR program. When the GDRs are offered simultaneously in Reg. S and Rule 144A
form, but not in separate and distinct tranches, they exist inside what is known as a unitary
GDR program. The ability of retail investors to purchase GDRs will depend on the type and
location of the listing. In general, however, GDR offerings are aimed at institutional investors
and depending on the exchange, they can then be purchased by retail investors in the
secondary market. GDRs are usually offered to institutional investors through a private offering,
in reliance on exemptions from registration under the Securities Act of 1933. These exemptions
are Regulation S (Reg. S) for non-U.S. investors, and Rule 144A for U.S. investors that are
Qualified Institutional Buyers (QIBs). The availability of these exemptions for GDR deals makes
them an efficient and cost-effective means of implementing a cross-border capital-raising
transaction. Due to the general flexibility afforded by GDRs, issuers from a variety of regions,
including Europe, the Middle East and Africa; Asia Pacific; and Latin America, have been utilizing
GDR programs to help meet their capital-raising needs on an increasing basis.
FIGURE: 2
DIFFERENT TYPES OF GDR ISSUE

Literature Review
Several research studies have been carried out in the area of Depository receipts issues both in
India and abroad. Chakrabarti (2003) stated that several factors are likely to influence the
dynamics of ADR prices and volume. Since ADRs are dollar-priced entitlements to foreign
shares, movements in their prices and returns are naturally expected to be affected by those in
TYPES OF GDR
REGULATION S
GDR
RULE 144A GDR
BOTH UNDER
REGULATION S
AND 144A GDR
BIFURCATED GDR
PROGRAM
UNITARY GDR
PROGRAM

119
the underlying shares and the relevant exchange rate. The host country (the US) market
becomes the natural candidate for such a factor, since American investors, who are obviously
affected by the movements in the US market, trade ADRs. Thus, the US market movements
constitute a usual suspect in the study of ADR prices and returns. He further empirically
investigated that how much of the variation in ADR prices may be explained by different
variables affecting them and found that ADR issuance often has a temporary positive effect on
the underlying stock price, but usually does not materially alter the stocks relationships with
the US and Indian markets. Saxena (2005) analyzed the trend in ADR premiums and the
movement in ADR premium levels over 2001-2005 period. He also analyzed the relation in
movement of ADR prices with the prices of underlying equity and concluded that ADR prices do
not move in lock-step with underlying equity prices. A study conducted by Bank of New York,
Mellon (2007) to provide an independent, robust analysis of the value and liquidity effects of
depositary receipts (DRs) established by companies from emerging markets analysed DR
programs of 628 firms covering the period 1980-2007. The study covered the BRIC countries of
Brazil, Russia, India and China along with Asia, Eastern Europe, Middle East countries and Africa.
It was shown empirically that DR programmes established by firms in emerging markets add
significant value and improve home-market liquidity to the benefit of both issuers and
investors. DRs additionally provide a strong signal of willing disclosure, greater transparency
and superior governance, particularly important from emerging, less-regulated markets.
Likewise, several research studies were carried out on various aspects of ADR/GDR issues but
not much work has been done in Indian context. The present study aims at fulfilling this
vaccum.
Objective of study
The paper aims to analyze the relationship between the ADR prices with their underlying equity
prices and the S&P 500 Index. It also tries to show the sensitivity of the underlying equity prices
to one of the Indian stock market index i.e. BSE Sensex. In addition, the paper draws the
relationship between the different Indian stock market Indices (CNX Nifty and BSE Sensex) to
the US stock market Index S&P 500.

120
Methodology
For the purpose of the study, secondary data was collected from different websites and data
was analyzed using SPSS software.
Analysis and findings
The first ADR in India was issued by Infosys Technologies in 1999. All Indian ADRs are sponsored
ones and belong to Level II and Level III category. It is found from the established literature and
data that India ranks the highest in issuance of Depository Receipts among various other
countries.
Table: 1
YEAR Total ADR/GDR Issues US $ Million
2000-01 831
2001-02 477
2002-03 600
2003-04 459
2004-05 613
2005-06 2552
2006-07 3776
2007-08 8769
2008-09 1162
2009-10 3328
2010-11 2049
2011-12 597
2012-13 187
Source: Handbook of Statistics, SEBI

Descriptive Statistics
N
Minimu
m
Maximu
m Mean
Std.
Deviation
ADRs:

ICICI BANK LTD. $

61

12.46

52.58

36.0643

9.91018
INFOSYS LTD. $ 61 24.20 76.08 49.4711 12.67124
REDIFF.COM $ 61 1.52 16.43 4.5189 2.93818
SESA STERLITE Ltd. $ 61 4.60 18.61 11.3843 4.18360

121
SIFY $ 61 .59 8.25 2.5241 1.42188
DR REDDYS LAB $ 61 8.02 39.24 26.9718 9.58850
HDFC BANK LTD. $ 61 26.28 184.37 86.9043 53.05657
TATA MOTORS LTD. $ 61 3.51 32.71 18.6751 7.93558
WIPRO $ 61 5.69 23.31 12.1041 4.34852
MTNL $ 61 .74 5.02 2.4016 1.22167
Valid N (listwise) 61

N
Minimu
m
Maximu
m Mean
Std.
Deviation
STOCKS :

ICICI BANK LTD. Rs.

61

328.10

1190.85

869.832
8

230.52454
INFOSYS LTD. Rs.
61 1117.85 3445.00
2397.58
93
568.85699
SESA STERLITE Ltd. Rs. 61 74.4 471.1 234.882 97.6354
DR REDDYS LAB Rs.
61 391.3 2215.4
1329.37
8
499.0046
HDFC BANK LTD. Rs. 61 177.0 703.7 429.104 150.2343
TATA MOTORS LTD.
Rs.
61 136.35 1306.30
528.840
2
361.12928
WIPRO Rs. 61 207.4 706.8 425.366 116.3902
MTNL Rs. 61 17.3 104.2 53.865 26.0023

N
Minimu
m
Maximu
m Mean Std. Deviation
INDICES:

S & P BSE SENSEX

61

8891.61
0

20509.0
90

16597.9
26

3011.808
CNX NIFTY
61 2802.3 6134.5
4990.10
5
893.3480
S & P 500
61 735.09 1630.74
1215.39
18
210.70744

122
It is observed that HDFC Bank ADR is having the highest average price among the others with
the highest standard deviation as well. While in the domestic market Infosys ltd. shares has the
highest mean price. In case of indices, S&P 500 has the lowest deviation from its mean.
The correlation between the ADR prices and the underlying stock prices of these companies
was studied (Table 6, also Refer to Annexure 1) and it was found that all the eight companies of
the sample showed significant correlation in their ADR prices and their underlying stocks except
that of HDFC Bank Ltd. which shows a negative correlation and Tata Motors which showed a
considerably lesser correlation of 40% only. This suggests that the ADR prices move in tandem
with their underlying stocks in the Indian market.
Summarized result (1)
ADR NAME
CORRELATION WITH
UNDERLYING EQUITY
CORRELATION WITH S & P
500
ICICI BANK LTD. $ 0.961 0.619
INFOSYS LTD. $ 0.939 0.378
REDIFF.COM $ - 0.306
SESA STERLITE Ltd. $
0.898 -0.142
SIFY $ - 0.361
DR REDDYS LAB $ 0.964 0.76
HDFC BANK LTD. $ -0.274 -0.285
TATA MOTORS LTD. $
0.403 0.788
WIPRO $ 0.942 -0.184
MTNL $ 0.92 -0.669
A correlation analysis was also done between the ADR prices and S&P 500 index (Table 7, also
refer to Annexure 2) and it was observed that the ADR prices and their correlation with the S&P
500 Index is not so significant in case of the sample companies except that of Tata Motors Ltd.,
Dr. Reddys Lab and ICICI Bank Ltd. On the contrary, the underlying stocks of these companies
being traded on BSE (Table 8, also Refer to Annexure 3) showed more or less a significant
correlation with the S&P BSE Sensex (except MTNL stock which showed a negative correlation).
But an analysis of the S&P500 Index with the S&P BSE Sensex and CNX Nifty (Table 9) showed a
greater degree of correlation between them. This suggests over the given time period the
Indian Market and the US market was sufficiently correlated which may be due to the high

123
correlation between the ADR prices and their underlying stock prices because the underlying
securities prices showed a greater degree of sensitivity to the S&P BSE Sensex.
Summarized Result (2)

Correlation between CNX Nifty and S&P 500 and SENSEX and S&P 500
Correlations

S & P
500
CNX
NIFTY
S & P 500 Pearson
Correlation
1 .776(**)
Sig. (2-tailed) .000
N 61 61
CNX
NIFTY
Pearson
Correlation
.776(**) 1
N 61 61
** Correlation is significant at the 0.01 level (2-tailed).

STOCK CORRELATION WITH S& P BSE
SENSEX
ICICI BANK LTD.
Rs. 0.979
INFOSYS LTD. Rs. 0.884
SESA STERLITE
Ltd. Rs. 0.485
DR REDDYS LAB
Rs. 0.877
HDFC BANK LTD.
Rs. 0.812
TATA MOTORS
LTD. Rs. 0.495
WIPRO Rs. 0.413
MTNL Rs. -0.506

124
Correlations

S & P BSE
SENSEX
S & P
500
S & P BSE SENSEX Pearson
Correlation
1 .736(**)
N 61 61
S & P 500 Pearson
Correlation
.736(**) 1
N 61 61
** Correlation is significant at the 0.01 level (2-tailed).
Conclusion and Recommendations
ADR and GDR have emerged as an innovative instrument of investment. The relation between
the different ADR prices, their stock market indices, the change or trend in the underlying
stocks were examined which may provide with the general idea about the status of trading in
these instruments in the domestic market and the US market as well. It may also be concluded
that for a developing country like India, these depository receipts have enabled the investors as
well as the companies to tap the global market and become an international player. Although
the ADRs are a derivative of underlying equity, yet there may exist a significant difference in the
ADR prices compared to the price of underlying equity (i.e. the ADR premium). So before going
for investing in such avenues it is a must to note the trend in their prices and the prices of their
underlying securities also. Moreover, the introduction or permission for two way fungibility
scheme for the DR issues has paved the way for arbitraging opportunity in a more realistic way.
Hence, we can look forward to the companies and investors for more participation in such
issues in the years to come.
References
1. Chakraborti, R. (2003). An Empirical Study of Exchange Traded ADRs from India,
Money and Finance, ICRA Bulletin.
2. Fenn, G.W., (2000). Speed of issuance and adequacy of disclosure in the Rule 144A
high-yield debt market, Journal of Financial Economics 56, 383405.

125
3. Jayaraman, N., Shastri, K., Tandon, K., (1993). The impact of international cross listings
on risk and return: The evidence from American depositary receipts, Journal of Banking
and Finance, vol. 17, pp. 91-104.
4. Jitendranathan, T., T.R. Nirmalanandan and Tandon, K. (2000). Barriers to international
investing and market segmentation: Evidence from Indian GDR market, Pacific-Basin
Finance Journal, vol. 8, pp. 399-417.
5. Kadapakkam, P., Misra, L., Tse, Y., (2003). International Price Discovery for Emerging
Market Stocks: Evidence from Indian GDRs, Review of Quantitative Finance and
Accounting, September 2003, pp. 179199.
6. Karolyi, A, (1998), What Happens to Stocks that List Shares Abroad? A Survey of
Evidence and its Managerial Implications, NYU Salomon Brothers Center Monograph
series, 7, #1.
7. Miller, D.P., (1999). The market reaction to international cross-listings: Evidence from
depositary receipts, Journal of Financial Economics, vol. 51,103,123.
8. Moel, A., (2000). The Role of ADRs in the Development of Emerging Markets, Working
Paper. Harvard Business School.
9. Pinegar, J.M. and R. Ravichandran, (2002). Global and local information asymmetries,
illiquidity and SEC Rule 144A/Regulation S: The case of Indian GDRs, Journal of Banking
and Finance, vol. 26, pp. 1645-1673.
10. Saxena, S. (2006). Premia in the Indian ADR Market- An Analysis of Trend and Causes,
available at http:// www.
11. Eaton.T, Nofsinger.J, and Weaver, D. (2007). Disclosure and the cost of equity in
international cross-listing, Review of Quantitative Finance and Accounting, Volume 29,
Number 1, pp 1-24.

Analysis of Relationship of Adr and GDR Prices With The National and International Market

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Analysis of Relationship of Adr and GDR Prices With The National and International Market

Uploaded by

Copyright:

Available Formats

SAMZODHANA SAMZODHANA SAMZODHANA SAMZODHANA Journal of Management Research Journal of Management Research Journal of Management Research Journal of Management

You might also like