Saturday, February 10, 2007

About FCCBs, GDRs and ADRs

Let’s look at some of the definitions and details from the web on these instruments.

Foreign Currency Convertible Debenture. A type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.

These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. (Bondholders take advantage of this appreciation by means warrants attached to the bonds, which are activated when the price of the stock reaches a certain point.) Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs.

A Global Depository Receipt or Global Depositary Receipt (GDR) is a certificate issued by an international bank which can be subject of worldwide circulation on capital markets. GDRs are emitted by banks, which purchase shares of foreign companies and deposit it on the accounts. Global Depository Receipts facilitate trade of shares, especially those from emerging markets. Prices of GDRs are often close to values of related shares.

An American Depositary Receipt (ADR) is how the stock of most foreign companies trades in United States stock markets.

Each ADR is issued by a U.S. depositary bank and represents one or more shares of a foreign stock or a fraction of a share. If investors own an ADR they have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares.

Depositary banks have numerous responsibilities to the holders of ADRs and to the non-U.S. company the ADRs represent. The largest depositary bank is The Bank of New York.

Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADS).

The level of compliance to be shown by the company, with the laws of the country where its ADRs or GDRs are traded will depend on the type of float it decides to have. Whether it just wants its stock just to be available to the foreign investors or whether it wants to raise money from foreign shores etc., will decide the depth of the compliance levels.

The government came with a scheme during 1992/1993 to allow the Indian Corporate Sector to have access to the Global Capital Markets through issue of Foreign Currency Convertible Bonds (FCCBs)/Equity Shares under the Global depository Mechanism.

The guidelines were liberalized from time to time and the recent initiatives are listed below:

  1. Pricing guidelines for Indian listed companies FCCB/ADR/GDR were brought in alignment with SEBI's guidelines on domestic capital issues.
  2. Unilisted companies issuing FCCB/ADR/GDRs are now required to have prior or simultaneous listing in domestic stock exchange(s).
  3. Unlisted companies, which have issued ADR/GDR/FCCB, now required to list in domestic market by 31 March 2006. However, unlisted companies which had accessed FCCBs, ADR/GDRs in terms of guidelines at 22 May 1998 and are not making profit, be permitted to comply with listing condition on the domestic stock exchanges within three years of having started making profit. However, no fresh issues of FCCBs, ADR/GDRs by such companies will be permitted without listing first in the domestic exchanges.
  4. In order to rationalise the ADR/GDR guidelines further, Government exempted the companies, going in for an offering in the domestic market and a simultaneous or immediate follow on offering (within 30 days of domestic issue) through ADR/GDR issues wherein GDRs/ADRs are priced at or above the domestic price, from the requirement of the revised pricing guidelines.
  5. Unlisted Indian companies, which had issued FCCBs, ADRs/GDRs prior to 31 August 2005 and are not making profit are also permitted to sponsor such issues against existing shares and are permitted to comply with listing conditions on the domestic stock exchanges within three years of having started making profits.