Depository Receipts classes for Corporate Restructuring CS professional
Today we have brought an important article related to ‘Corporate Restructuring’, an important part of CS Professional. In this blog, we will discuss “Depository Receipts”.
Depository Receipts (DRs)
Depository Receipts means a negotiable instrument issued outside India by a Depository bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India. DRs are traded on Stock Exchanges in the US, Singapore, Luxemburg etc.
Concept of One way Fungibility vs Two way Fungibility
One way Fungibility:
In this, investors could cancel their depository receipt and recover the proceeds by selling the underlying shares in the Indian market; DRs once redeemed could not be converted into shares.
- After the expiry of lock-in period of 3 years, American ADR holders ask the Indian Brokers (viz Indiabulls / Religare) to purchase their ADRs in lieu of the shares.
- Then, brokers purchase the shares of the concerned Indian Company from Indian Stock market and “Swap” such shares for “ADRs”, i.e. obtain ADRs from American ADR holders & give them the equivalent equity shares.
- When the American ADR holders sell any shares in the Indian Stock market, then Indian brokers sell equivalent ADRs in the American market, & such ADRs are once again traded on NYSE/NASDAQ as the case may be, this is called as TWO WAY FUNGIBILITY.
For the detailed explanation of one way and two way fungibility, click here CS Professional classes online.
Why do company issue Depository Receipts?
The company issues DRs as a tool to access Global capital markets. Reasons for issuing DRs by a company are given below:
- To raise Capital
- Diversify Shareholder base into extended geographies
- Increase visibility & recognition in international market
- Global Image
- Set up Employee Stock Option Plans
- Facilitate Merger & Acquisition activity by creating a desirable acquisition currency.
Purpose of Investors to Invest in Depository Receipts
- Diversify Portfolio
- Convenience of holding foreign securities in their markets
- Simplification of trading and settlements (DRs trade and settle just like US or EURO securities)
- No restrictions on dealing: DRs are recognized as domestic securities.
- Avoid Currency risk.
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