About ADR, GDR, IDR and also SLR

Today I give you answers to two of the shout-box queries that were asked a couple of days ago. Incidentally what a rhyming in the naming?

19 Jul 07, 15:17

rishi raj: What is ADR,GDR,IDR ?What is the basic role they play in economy ?

ADR: American Depository Receipts

GDR: Global Depository Receipts

IDR: Indian Depository Receipts

Say if an Indian company wants to mobilize capital from abroad, can it do it? Even a novice will instantaneously come up with an answer like ‘NO’. We have too many controls which will not allow raising of capital abroad easily. This is what we ‘perceive.’ As we are liberalizing our economy, raising of capital from outside the country is slowly enabled by the government. ADRs and GDRs are the result of such liberalization.

What happens in these ADRs and GDRs is that an Indian corporate can deposit its stock (shares) with a foreign depository (foreign host country equivalents to our own NSDL and CSDL) and raise money from foreign public by offering these ADR/GDR issues for subscription. Usually the corporate conducts a road-show (advertising and publicity for its issue) and attracts the attention/interest of the foreign public to subscribe to its capital. The foreign governments and / or stock exchanges (where the issue will be listed) will have their own regulations (which are usually very stringent) which have to be complied with by the Indian corporate. The government liberalized the rules in this regard sometime in 2002.

And IDR is an exact reverse of the ADR/GDR issue. A foreign company can raise capital from Indian public, the same way that Indian companies can raise capital through ADR/GDR issues. The government of India framed the IDR rules sometime in 2004.

The basic role they play in the economy now should be very clear to you? Is it? Raising capital from foreigners or allowing foreign companies to raise capital in India.

19 Jul 07, 12:46

aparna: what is slr exactly

SLR stands for Statutory Liquidity Ratio (Banking) / Single Lens Reflex (Photography) and Self Loading Rifle (Policing).

I am not mocking at you; seriously. I am assuming that you are asking me about this in the context of banking. It stands for the percentage of net demand and time liabilities of a bank that has to be maintained by the Bank with the RBI. This can be in the form of cash, gold or approved securities. This percentage currently is at 25%. The Banking Regulation Act, 1949 actually prescribes a floor and ceiling for this percentage. The floor is at 25% and the ceiling is at 40%. That is, the RBI can't impound more than 40% of the net demand and time liabilities of banks nor can it prescribe a percentage which is below 25% for this purpose. It has to operate within this band. But recently the BR Act, 1949 was amended doing away with the floor. This gives RBI flexibility to prescribe a percentage of SLR which is lower than 25%. On the SLR funds, the RBI has to pay the banks interest. It is currently at 7.5%.

Contrast this with CRR -- Cash Reserve Ratio, wherein the Bank has to maintain a certain percentage of its net time and demand liabilities in the form of cash with the RBI. CRR at present is 6.25%. On the CRR funds, RBI will not pay any interest to the banks.

You can take the ‘net demand and time liabilities’ broadly to means the deposits of the bank. Why this term is used is that many a time there will be situations in which the deposits figure will not be reflecting the actual deposits. It is the ‘net’ figure that is to be taken and not the ‘gross’ figure. Demand liabilities are those that have to be paid by the bank on ‘demand.’ And ‘time liabilities’ are those that have a time within which the bank has to pay these liabilities. Time deposits like bank FDs (Fixed Deposits) come under this ‘time liabilities’ category.