INDEX

CONTENT PAGE NO.

Introduction 1
Depository System 2
• Constituents of Depository System 3
• Functioning of a depository 5
• Switching over to depository 8
• Option of Rematerialisation 9
• Benefits of Depositories 9
• Benefits of demat 10
• Functions of a Depository 11
• Types of Depository Institutions 12
Indian Depository Receipt 13
• Definition 13
• Legal provisions Governing an IDR 13
American Depository Receipt 21
• History of ADR 21
• Difference between shares and ADR 22
• Foreign Companies listing ADR 22
• Sponsored vs Unsponsored ADR 22
• Levels of ADR 23
• Termination or Cancellation 24
Global Depository Receipts 24
• GDR Characteristics 25
• Trading GDRs 26
• Advantages of GDRs 26
• Disadvantages of GDRs 27
Conclusion 27
References 28

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 Depositories – IDR, ADR and GDR
Introduction:
A significant development of the 20th century particularly in its later part is expansion of financial
market world over which mostly was driven by globalization, technology, innovations and
increasing trade volume. India has not been an exception with probably largest number of listed
companies with a very large investor population and ever-increasing volumes of trades. However,
this continuous growth in activities increased problems associated with stock trading. Most of
these problems arose due to the intrinsic nature of paper-based trading and settlement, like theft or
loss of share certificates. This system required handling of huge volumes of paper leading to
increased costs and inefficiencies. The process beginning from buying shares through the stock
exchanges till getting the certificates duly endorsed in the buyer’s name was indeed quite complex
and time-consuming and was riddled with a variety of problems. Growing number of investors
participating in the capital market has increased the possibility of being hit by a bad delivery, the
cost and time spent by the brokers for rectification of these bad deliveries tends to be higher with
the geographical spread of the clients. The increase in trade volumes lead to exponential rise in the
back-office operations thus limiting the growth potential of the broking members. The
inconvenience faced by investors (in areas that are far flung and away from the main metros) in
settlement of trade also limits the opportunity for such investors, especially in participating in
auction trading. The physical form of holding and trading in securities also acted as a bottleneck
for broking community in capital market operations. Risk exposure of the investor also increased
due to this trading in paper. Some of these associated risks were: delay in transfer of shares,
possibility of forgery on various documents leading to bad deliveries, legal disputes etc.,
possibility of theft of share certificates, prevalence of fake certificates in the market, mutilation or
loss of share certificates in transit. Thus, the system of security transactions was not as investor-
friendly as it ought to be. In this scenario dematerialized trading under depository system emerged.
This popular financial service emerged in Germany first time. The framework of this assignment
is listed as follows:
1. Depository System
2. Indian Depository Receipt (IDR)
3. American Depository Receipt (ADR)
4. Global Depository Receipt (GDR)

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Depository System 1:
• Depository system essentially aims at eliminating the voluminous and cumbersome paper
work involved in the scrip-based system and offers scope for ‘paperless’ trading through
state-of-the-art technology. It is an institution which maintains an electronic record of
ownership or securities. The storage and handling of certificates is hence immediately
eliminated which generates a reduction in costs like back office cost for handling,
transporting and storing certificates.
• Depositary participant is an institution akin to bank for securities. When an investor hands
over securities to a depository participant, investor’s account is credited. The investor’s
depository system account will show their holdings. His account is updated for his
transactions of sale and purchase but without physical movement of scrips or transfer
deeds. In depository system, share certificates belonging to the investors are dematerialized
(demats). Dematerialization or “Demat” is a process whereby investors’ securities like
shares, debentures etc., are converted into electronic data and stored in computers by a
Depository. Securities registered in investor’s name are surrendered to depository
participant (DP) and these are sent to the respective companies who will cancel them after
“Dematerialization” and credit investor’s depository account with the DP. The securities
on Dematerialization appear as balances in one’s depository account. These balances are
transferable like physical shares. If at a later date, investors wish to have these “demat”
securities converted back into paper certificates, the Depository does this and their names
are entered in the records of depository as beneficial owners. The beneficial ownership will
be with investor but legal ownership will be with the depository. Consequently, benefits
like interest, dividend, rights: bonus and voting rights will be with investors. Since
depository is to get securities transferred in its name, the depository name will be registered
in the ownership register maintained by the company. Thus, instead of name of several
owners, the name of depository figures in the register of company. Since transfer will be
affected only in depository, register of company need not be updated on every transaction
of sale or purchase of company’s share. It alleviates the hardships currently faced by the
investors and it also offers option for converting the shares from electronic to physical or

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 paper form through a process of rematerialisation (remat). Depository system is, indeed,
time tested and long prevalent in many advance countries and has been playing a significant
role in stock markets around the world.

Constituents of Depository System:

The depository system comprises of:
i) Depository
ii) Depository Participants (DPs)
iii) Companies/Registrars
iv) Investors

Depository 2:
Depository functions like a securities bank, where the dematerialized physical securities
are traded and held in custody. This facilitates faster risk free and low-cost settlement.
Depository is much like a bank and performs many activities that are similar to a bank
depository:
a) enables surrender and withdrawal of securities to and from the depository through the
process of ‘demat’ and ‘remat’,
b) maintains investors’ holdings in electronic form,
c) effects settlement of securities traded in depository mode on the stock exchanges,
d) carries out settlement of trades not done on the stock exchanges (off market trades).

• A Depository refers to a place or entity that holds financial securities in a dematerialized

form. A bank, organization, or any institution holding and assisting in security trading is
referred to as a depository. Depository accounts hold securities in the same way that bank
accounts hold funds.
• A depository can also be a place where something is held for safekeeping or storage. Hence,
a depository can be an institution, a building, or a warehouse, that enables individuals and
businesses to deposit any valuable asset for safeguarding. The money deposited in a

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 depository is used for investing in some other securities and lending to other people or
businesses; thus, providing liquidity in the exchange market.
To summarize,
1. A depository refers to a place or entity that holds financial securities in a dematerialized
form, eliminating the risk related to holding physical financial securities.
2. A depository functions as a connection between the public companies that issue financial
securities and the investors or shareholders.
3. A depository holds the securities of customers and gives them back when the customers
want.
In India a depository has to be promoted as a corporate body under Companies Act, 1956. It is also
to be Registered as a depository with SEBI. It starts operations after obtaining a certificate of
commencement of business from SEBI. It has to develop automatic data processing systems to
protect against unauthorized access. A network to link up with depository participants, issuers and
issuer’s agent has to be created.

Depository Participants (DP) 3:

A DP is investors’ representative in the depository system and as per the SEBI guidelines,
financial institutions/banks/custodians/stock brokers etc. can become DPs provided they meet the
necessary requirements prescribed by SEBI. DP is also an agent of depository which functions as
a link between the depository and the beneficial owner of the securities. DP has to get itself
registered as such under the SEBI Act. The relationship between the depository and the DP will
be of a principal and agent and their relation will be governed by the bye-laws of the depository
and the agreement between them. Application for registration as DP is to be submitted to a
depository with which it wants to be associated. The registration granted is valid for five years and
can be renewed. As depository holding the securities shall maintain ownership records in the name
of each DP, DP in return as an agent of depository, shall maintain ownership records of every
beneficial owner (investor) in book entry form. A DP is the first point of contact with the investor
and serves as a link between the investor and the company through depository in dematerialisation

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of shares and other electronic transactions. A company is not allowed to entertain a demat request
from investors directly and investors have to necessarily initiate the process through a DP.

Functioning of a depository:
The depository system operates through depository account.
Depository Account
An investor desiring to demat his holdings has to open a depository account where in all details of
investors’ transactions is recorded. Opening such account is as simple as opening a bank account.
Investor can open a depository account with any DP 4 convenient to him. There is no restriction on
the number of depositories accounts a person can open. However, if existing physical shares are
in joint names, one has to open a joint account submitting share certificates for demat. A sole
holder of the share certificates cannot add more names as joint holders at the time of
dematerialising his share certificates. A client can choose to open more than one account with the
same DP. In addition to this, he has a choice of opening accounts with more than one DP. However
a broker can open just one Clearing Member (CM) account per card/stock exchange for clearing
purpose, but he can still open multiple beneficiary accounts. Beneficiary is the personal account
wherein brokers can keep their personal holdings. A clearing member cannot hold his personal
holdings in his clearing member account. A broker may deal in the depository system as a clearing
member only through a special account, known as the Clearing Member account. This account can
be used only for clearing purposes and not for holding his own securities in it. As this is a transitory
account, the securities held in this account are not eligible for corporate actions. Therefore. the
broker will have to open a separate beneficiary owner account to hold his investments. There is no
compulsion for the client to open his account with the same DP as that of his broker. Even if he
has an account with another DP, he can carry out normal business with his broker. There is no loss
in operational efficiency. But it is possible that opening account with his broker’s DP may work
out to his advantage, as some DPs may offer special charge structure if the broker and his clients
are dealing through him. To open an account one has to:
1. Fill up the account opening form, which is available with the DP.
2. Sign the DP-client agreement, which defines the rights and duties of the DP and the person
wishing to open the account.

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 3. Receive client account number (client ID).
This client ID along with his DP ID gives investor a unique identification in the depository system.
In depository account, transactions are through demat and remat.

Dematerialisation (Demat)
‘Demat’ is a process by which investors’ share certificates are taken back by company through
DP, verified and if found in order, demat is confirmed by the company and then an equivalent
number of shares are credited by the DP to investors account as electronic holding. The entire
process of dematerialisation, as required by SEBI, has to be completed within a period of 15 days.
Dematerialisation is also known as immobilization of securities. Dematerialisation can be done
only on the request made by the investor through participant in a Dematerialisation Request Form
(DRF). Thus, ‘Dematerialisation’ is a process where by physical existence of security certificates
is made extinct and converted into electronic holdings. The process is explained step by step as
follows:
1. Investor surrenders certificates for dematerialization to DP.
2. DP intimates depository of the request through the system.
3. DP submits the certificates to the registrar.
4. Registrar confirms the dematerialization request form depository.
5. After dematerializing, registrar updates accounts and informs the DP.
6. DP updates its accounts and informs investor.
Rematerialisation (Remat)
Rematerialisation is a process of converting electronic holdings of investor back into share
certificates in paper form. The process of rematerialisation is also carried out through DP and the
process has to be completed within a period of 30 days. Thus, once security is dematerialised it is
not necessary that investor is to continue in depository mode for all times to come. He can switch
over to remat whereby he gets back physical possession of security scrips. The client of DP has to
submit a request for remat. This request is forwarded for necessary action to depository. The
depository confirms the rematerialisation request to the Registrar and Transfer Agents. The
Registrar updates the accounts and print the desired certificate. The depository is informed by
Registrar and certificate is sent to the investor. The depository updates its records and

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communicates to DP to incorporate necessary changes in the account of the client. The
rematerialisation is explained step by step as follows:
1. Beneficial owner requests for rematerialisation.
2. DP intimates of the Depository request through the system.
3. Depository confirm Rematerialisation request to the registrar. Registrar updates accounts
and prints certificates.
4. Depository updates accounts and downloads details to DP.
5. Registrar dispatches certificates to investor.
Fungibility:
Int the depository system, since the physical form of security loses its relevance, the securities are
to be ‘fungible’. Prior to amendment in 1996, the Companies Act 1956 required every specific
physical scrip of security as shares or debentures to have distinctive number for each security when
issued or transferred. Securities have been made fungible by deleting section 83 of the Companies
Act, 1956. Now the certificates will not carry a distinct number and will form a part of a ‘fungible
mass’. Dematerialized shares do not have any distinctive or certificate numbers. These shares are
fungible - which means that 100 shares of a security are the same as any other 100 shares of that
security. All the certificate of the same security will become interchangeable in the sense that the
owner of the security will lose the right to obtain the exact certificate. The situation of certificate
is now that of currency note and the number of currency note has no association with ownership
of currency note. Each security held in dematerialized form is given an identity and it is in form
of a distinctive ISIN (International Securities Identification Number). ISIN is a 12 character long
identification mark.

Delivery vs. Payment 5:

Delivery vs. Payment involves exchange of securities for funds to take place simultaneously
between the parties to a trade. While the depository system would be able to handle the accounting
of securities by book entry, the funds part would have to be handled by the banking system.
Therefore, the two systems have to be integrated in order to have DVP. It is too simplistic to think
that DVP would be possible without having an efficient electronic funds transfer system because

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in India, the payment systems are still not upgraded. A quantum jump is required in the level and
mode of interaction among the various banking institutions.

Switching over to depository:

The process of switching over to depository system form scrip-based system is explained below:
i) Appointing DP
Any investor who intends to transact through depository system has to engage one depository
participant (DP). He can approach a DP of his choice and open an account with him just like
one opens an account with a bank. Investor gets an identification number called Client ID (just
as one gets one’s bank account number) which serves as a reference point for all his
transactions with D.P. Every investor before getting his holding dematerialised has to enter
into an agreement with the depository through a participant. This step is necessary whether
investor already has securities or securities are yet to be issued in a fresh issue. The investor
contracts only with that depository which accepts his securities in ‘depository mode’ since it
is not necessary that all eligible securities must be in depository mode and with all the
depositories. The decision on whether or not to hold securities within the depository mode and
if in depository mode, with which depository or participants, would be entirely with the
investor.

ii) Request for ‘Demat’

After any agreement is entered for getting securities dematerialised and his account is opened,
the investor makes an application to depository participants in form called ‘Dematerialisation
Request Form’ (DRF) to be provided by the DP and hands over his share certificates duly
cancelled by writing’ surrendered for dematerialisation’ to them for demat. The DP will accept
certificates registered only in investor’s name. The request for dematerialisation with the
depository participants is sent to the depository through depository network with which DP is
connected. Simultaneously DP submits the securities certificates to the issuer company or its
Registrar of transfer.

iii) Approach the Company or Registrar of Transfer

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 The depository will electronically intimate the issuer or its ‘Registrar and transfer agent’ of the
dematerialisation request. The issuer or the ‘Registrar and transfer agent’ has to verify the
validity of the security certificates as well as the fact that the DRF has been made by the person
recorded as a member in its Register of Members. If the issuer or its Registrar is satisfied, it
dematerializes the scrip and updates its record.

iv) Confirmation of Demat

The Registrar to transfer or the concerned company when satisfied with the case of demat has
to inform the depository of the completion of dematerialisation authorizing an electronic credit
for that security in favor of the investor.

v) Crediting the Client’s Account

DP credits investor’s account with the number of shares so dematerialised and thereafter
investor hold the securities in electronic form. If there is rejection of demat request then such
credit is not given. After crediting the account, the client is send the necessary information in
form of a statement like we get bank statement after bank transactions.

Option of Rematerialisation:
Investor also has the option of converting his electronic holding into share certificates by
requesting DP for a remat in a Rematerialisation Request Form (RRF) and through a similar
process, company will issue new certificates to investor for the shares so rematerialized.

Benefits of Depositories:
1. The emergence of depository system is a sign of prosperity of financial market system
specially capital market.
2. Depository makes the market more systematic and disciplined.
3. Depositories pass on the benefits and rights to the transferee quickly since the whole system
is efficient and automated.
4. Time lost in communication too is very low.
5. Fraudulent encashment of dividend warrants and loss of bonus or rights can be avoided.

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 6. Since depository is to have a scrip-less capital market, exchange of physical scrips is not
desired. Thus, the risk of loss, mutilation: theft and forgery of security certificates is ni;
7. Financial loss owing to loss of physical scrip will no longer haunt the investors.
8. A depository system provides benefits to all the constituents of the capital markets viz. the
country, investors, intermediaries and the issuers.
9. Official expectations from dematerialisation of securities was expressed by SEBI in
following words in its Annual Report 1996-97, “It is expected that as the network of
depository participants and the proportion of securities dematerialized in the depository
increases, the benefits of reduced risk and lower transaction costs will extend to the vast
majority of the market participation and lead to improved investor protection and services”.

Benefits of demat:
Transacting the depository way has several advantages over the traditional system of transacting
using share certificates. Some of the benefits are:
1. Trading in demat segment completely eliminates the risk of bad deliveries, which in turn
eliminates all cost and wastage of time associated with follow up for rectification. This
reduction in risk associated with bad delivery has led to reduction in brokerage to the extent
of 0.5% by quite a few brokerage firms.
2. In case of transfer of electronic shares, one saves 0.5% in stamp duty. Cost of
courier/notarization/the need for further follow-up with broker for shares returned for
company objection is also saved.
3. In case the certificates are lost in transit or when the share certificates become mutilated or
misplaced, to obtain duplicate certificates, one may have to spend at least Rs.500 for
indemnity bond, newspaper advertisement etc, which can be completely eliminated in the
demat form.
4. One can also receive bonuses and rights into depository account as a direct credit, thus
eliminating risk of loss in transit.
5. One can also expect a lower interest charge for loans taken against demat shares as
compared to the interest for loan against physical shares. This could result in a saving of
about 0.25% to 1.5%. Some banks have already announced this.

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 6. RBI has increased the limit of loans against dematerialized securities as collateral to Rs.2
million per borrower as against Rs.1 million per borrower in case of loans against physical
securities.
7. RBI has also reduced the minimum margin to 25% for loans against dematerialized
securities as against 50% for loans against physical securities.
The perceptions about safe keeping, risk taking, liquidity and credibility of the market has
undergone a sea change with the full-scale operation of depository system and electronic funds
payment coupled with the automated trading systems.

Functions of a Depository 6:
1. Serves as a link between public companies and investors/shareholders
A depository functions as a connecting link between the public companies that issue financial
securities, and the investors or shareholders. The securities are issued by agents associated with
depositories, who are known as depository participants. The agents are responsible for transferring
the securities from the depositories to the investors. A depository participant can be a bank, an
institution, or a brokerage.
2. Eliminates risk related to owning physical financial securities
A depository allows traders and investors to hold securities in dematerialized form; thus,
eliminating the risk related to holding physical financial securities. The buyers and sellers now do
not need to check whether the securities have been transferred successfully without any loss or
theft. The depository system reduces such risks by allowing the securities to be held and transferred
in electronic form.
3. Allows the provision of loans of mortgages to interested parties
A depository holds the securities of customers and gives them back when the customers want. The
customers receive interest on the deposits, while the depository earns even more interest by lending
the deposits to other people or businesses in the form of loans or mortgages.
4. Reduced paperwork and accelerates the process of transferring securities
When a trade occurs, a depository transfers the ownership of securities from the account of one
investor to another. It helps in reducing the paperwork associated with the finalization of a trade
and accelerates the process of transfer of securities.

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Types of Depository Institutions 7
The following are the three main categories of depository institutions:

1. Commercial Banks
Commercial banks are for-profit organizations and generally owned by private investors. The
range of services offered by commercial banks depends on the size of the banks. For example, the
services offered by the smaller banks are limited to consumer banking, small mortgages and loans,
simple deposits, banking for small-business, and other services. The market range is also limited
in the case of smaller banks.
On the contrary, larger banks and global banks offer a wide range of services such as foreign
exchange-related services, money management, and investment banking. Some larger and global
banks may also offer services for other banks and large organizations. The services offered by the
large banks is the most diverse among all depository institutions.

2. Credit Unions
Credit unions are financial cooperatives implying that these depository institutions are owned by
members of a particular group. The profits earned are either paid to the members as dividends or
reinvested into the organization. The members of the credit unions are the ones that own accounts
in the institution; hence, the depositors are also partial owners and receive dividends.
Since credit unions are non-profit institutions, they pay no federal or state tax. Hence, the interest
rate charged by credit unions on loans is lower, and they pay a higher interest rate on deposits.

3. Savings Institutions
The banks serving a local community and loan institutions are called savings institutions. The local
residents deposit money in the banks, and their money is offered back in the form of mortgages,
consumer loans, credit cards, and loans for small businesses.
Savings institutions can sometimes be set up as corporations or as financial cooperatives allowing
the depositors to get an ownership share in the organization.

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 INDIAN DEPOSITORY RECEIPT 8 (IDR)
Definition:
According to FAQs issued by SEBI 9 in this regard an IDR is defined as “an instrument
denominated in Indian Rupees in the form of a depository receipt created by a Domestic
Depository (custodian of securities registered with the SEBI) against the underlying equity of
issuing company to enable foreign companies to raise funds from Indian securities markets”. In a
sense IDRs are a kind of derivatives which derive their values from the underlying assets in this
case the foreign companies’ shares.

Legal Provisions Governing an IDR:

The issue of IDRs is governed by Companies Act, 1956, SEBI (Issue of Capital and Disclosure
Requirements), Regulations 2009 and RBI Circular on the same.
Apart from these the regular requirements applicable to any issue and listing of shares are
applicable in this case also.

Companies (Issue of Indian Depository Receipts) Rules, 2004:

There are some very relevant and mandatory provisions to be complied for issue, listing, transfer
and disclosure purpose in case of an IDR. Some of important among them are as follows:
1. Applicability:
These rules shall apply only to those companies incorporated outside India, whether they
have or have not established any place of business in India. Thus these rules are extra terr
itorial in nature.

2. Eligibility for issue of IDRs:

Without prejudice to anything contained in the Securities and Exchange Board of India
Act, 1992, an issuing company may issue IDRs only if it satisfies the following
conditions:

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 a) Its pre-issue paid-up capital and free reserves are at least US$ 100 million and it has
had an average turnover of US$ 500 million during the 3 financial years preceding the
issue.
b) It has been making profits for at least five years preceding the issue and has been
declaring dividend of not less than 10% each year for the said period.
c) Its pre-issue debt equity ration is not more than 2:1.
d) It shall fulfil the eligibility creiteria laid down by SEBI from time to time in this behalf.

3. Procedure for making an issue of IDRs:

a) No issuing company shall raise funds in India by issuing IDRs unless it has obtained
prior permission from the SEBI. An application seeking permission shall be made to
the SEBI at least 90 days prior to the opening date of the issue, in such form furnish
such information as may be notified from time to time with a nonrefundable fee of
US $10,000. Provided that, on permission being granted, an applicant shall pay an
issue fee of half a percent of the issue value subject to a minimum of Rs.10 lakhs
where the issue is up to Rs.100 crore in Indian rupees. Provided further where the
issue value exceeds Rs.100 crore, every additional value of issue shall be subject to
a fee of 0.25 percent of the issue value. The SEBI may, on receipt of an application
seeking permission call for such further information, and explanations, as may be
necessary, for disposal of such application.
b) The issuing company shall obtain the necessary approvals or exemption from the
appropriate authorities from the country of its incorporation under the relevant laws
relating to issue of capital, where required.
c) The issuing company shall appoint an overseas custodian bank, a domestic depository
and a merchant banker for the purpose of issue of IDRs and deliver the underlying
equity shares or cause them to be delivered to an Overseas Custodian Bank and the said
bank shall authorize the domestic depository to issue IDRs.
d) The issuing company shall file through a merchant banker or the domestic depository
a due diligence report with the Registrar and with SEBI in the form specified.
e) The issuing company shall, through a merchant Banker file a prospectus or letter of
offer certified by two authorized signatories of the issuing company, one of whom

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 shall be a wholetime director and other the Chief Accounts Officer, stating the
particulars of the resolution of the Board by which it was approved, with the SEBI
and Registrar of Companies, New Delhi, before such issue.
f) The draft prospectus or draft letter of offer shall be filed with SEBI, through the
merchant banker, at least 21 days prior to the filing the prospectus or letter of offer.
Provided that if within 21 days from the date of submission of draft prospectus or letter
of offer, SEBI specifies any changes to be made therein, the prospectus shall not be
filled with the SEBI/Registrar of Companies unless such changes have been
incorporated therein.
g) The issuing company, seeking permission under sub-rule (i) above, shall obtain in-
principle listing permission from one or more stock exchanges having nationwide
trading terminals in India.

4. IDRs shall not be redeemable into the underlying equity shares before the expiry of one-
year period form the date of the issue of the IDRs.

5. IDRs issued by any issuing company in any financial year shall not exceed 15 per cent of
its paid-up capital and free reserves.
6. The Merchant Banker to the issue of IDRs shall deliver for registration the following
documents or information to the SEBI and Registrar of Companies at New Delhi, namely:
i. instrument constituting or defining the constitution of the issuing company;
ii. the enactments or provisions having the force of law by or under which the incorporat
-ion of the issuing company was affected, a copy of such provisions attested by an
officer of the company be annexed;
iii. if the issuing company has established place of business in India, address of its
principal office in India;
iv. if the issuing company does not establish principal place of business in India, an
address in India where the said instrument, enactments or provision or copies thereof
are available for public inspection, and if these aren’t in English,a translation thereof
certified by a responsible officer of the issuing company shall be kept for public
inspection;

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 v. a certified copy of the certificate of incorporation of the issuing company in the
country in which it is incorporated;
vi. copies of the agreements entered into between the issuing company, the overseas
custodian bank, the domestic depository, which shall inter alia specify the rights to be
passed on to the IDR holders;
vii. if any document or any portion thereof required to be filed with the SEBI/ Registrar of
Companies is not in English language, a translation of that document or portion thereof
in English, certified by a responsible officer of the company to be correct and attested
by an authorized officer of the Embassy or Consulate of that country in India, shall be
attached to each copy of the document.
viii. The prospectus to be filed with the SEBI and Registrar shall contain the particulars as
prescribed in Schedule and shall be signed by all the whole-time directors of the issuing
company and by the Chief Accounts Officer.

7. Conditions for the issue of prospectus and application are as follows:

a) No application form for the securities of the issuing company shall be issued unless
the form is accompanied by a memorandum containing the salient features of
prospectus in the specified form.
b) An application form can be issued without the memorandum as specified in clause (i)
above if it is issued in connection with an invitation to enter into an underwriting agre
ement with respect to the IDRs.
c) The prospectus for subscription of IDRs of the issuing company which includes a
statement purporting to be made by an expert shall not be circulated, issued or
distributed in India or abroad unless a statement that the expert has given his written
consent to the issue thereof and has not withdrawn such consent before the delivery of
a copy of the prospectus to the SEBI and Registrar of Companies, New Delhi, appears
on the prospectus.
d) The person(s) responsible for issue of the prospectus shall not incur any liability by
reason of any non‐compliance with or contravention of any provision of this rule, if‐
i. as regards any matter not disclosed, he proves that he had no knowledge thereof, or
ii. as regards any matter not disclosed, he proves that he had no knowledge thereof, or

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8. Listing of Indian Depository Receipt:
The IDRs issued under this Rule shall be listed on the recognized Stock Exchange(s) in
India and such IDRs may be purchased, possessed and freely transferred by a person
resident in India as defined in section 2(v) of Foreign Exchange Management Act, 1999,
subject to the provisions of the said Act.

9. Procedure for transfer and redemption:

a) A resident holder of IDRs may transfer the IDRs or may ask the Domestic Depository
to redeem these IDRs, subject to the provisions of the Foreign Exchange
Management Act, 1999 and other laws for the time being in force.

b) In case of redemption, Domestic Depository shall request the Overseas Custodian

Bank to get the corresponding underlying equity shares released in favour of the Indian
resident for being sold directly on behalf of Indian resident, or being transferred in the
books of issuing company in the name of Indian resident and a
copy of such request shall be sent to the issuing company for information.

c) In case of redemption, Domestic Depository shall request the Overseas Custodian

Bank to get the corresponding underlying equity shares released in favour of the Indian
resident for being sold directly on behalf of Indian resident, or being transferred in the
books of issuing company in the name of Indian resident and a
copy of such request shall be sent to the issuing company for information.

10. Continuous Disclosure Requirements:

i. The Issuing company shall furnish to the Overseas Custodian Bank and Domestic
Depository, a certificate obtained by it from the statutory auditor of the company or a
Chartered Accountant about utilization of funds and its variation from the projections
of utilization of funds made in the prospectus, if any, in quarterly intervals and shall

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 also publish it or cause to be published in one of the English language newspater having
wide circulation in India.
ii. The quarterly audited financial results should be prepared and published in newspapers
in the manner specified by the listing conditions

11. Distribution of corporate benefits:

On the receipt of dividend or other corporate action on the IDRs as specified in the
agreements between the issuing company and the Domestic Depository, the Domestic
Depository shall distribute them to the IDR holders in proportion to their holdings of IDRs.

12. Penalty 10:

If a company or any other person contravenes any provision of these rules for which no
punishment is provided in the Act, the company and every officer of the company who is
in default or such other person shall be punishable with the fine which may extend to twice
the amount of the IDR issue and where the contravention is a continuing one, with a further
fine which may extend to five thousand rupees for every day, during which the
contravention continues.
13. Repeal and savings:
On the commencement of these rules, all rules, orders or directions in force in relation to
any matter for which provisions are made in these rules shall stand repealed, except as
respects things done or omitted to be done before such repeal.

14. Power of Central Government to decide certain Questions:

If any question arises on the applicability and interpretation, such question shall be decided
by the Central Government.

Companies Act, 1956:

Apart from the above-mentioned provisions under the Companies (Issue of Indian Depository
Receipt) Rules 2004, the provisions in Companies Act with regards to Foreign Companies as

chromeextension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.indiacode.nic.in/bitstream/123456789/1955/1/
10

A1996_22.pdf

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mentioned in Sections 591 to 608 shall continue to be applicable. This is to be noted that the above
Rules itself are issued by the Central Government through Ministry of Corporate Affairs taking
power from Section 605A [inserted by Companies (Amendment) Act, 2000] of the Companies Act
1956. Also, Sections 603, 604, 605, 606 and 607 specifically deal with the issue of Prospectus by
a Foreign Company offering its shares or debentures for subscription by the public.
1. Obligation of Foreign Company as to state certain things in its prospectus:
As per Clause (a) Section 595 “every Foreign Company shall in every prospectus inviting
subscriptions in India for its shares or debentures, state the country in which the company
is incorporated”. Also sub‐section (i) of Clause (d) of Section 591 states that “if the liability
of the members of the company is limited, cause notice of that fact to be stated in every
such prospectus as aforesaid and in all......” As per Section 598 “If any foreign company
fails to comply with any of the foregoing provisions of this part, the company, and every
officer or agent of the company who is in default, shall be punishable with fine which may
extend to ten thousand rupees, and in the case of a continuing offence, with an additional
fine which may extend to one thousand rupees for every day during which the default
continues.”
2. Provisions relating to Prospectuses‐ its form and contents:
Section 603 deals in details about the form and contents of the prospectuses issued by a
foreign company. Some of the salient features of these are discussed below‐
No person shall issue, circulate or distribute in India any prospectus of a foreign company
with or without its place of business in India, unless the same is dated and contains
following information‐
a) The instrument constituting or defining the constitution of the company.

b) The enactments or provisions having the force of enactments, by or under which the
incorporation of the company was effected

c) An address in India where the said instrument, enactments, or provision, or copies

thereof, and if the same are not in English, a translation thereof certified in the
prescribed manner, can be inspected .

d) The date on which and the country in which the company was incorporated

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 e) Whether the company has established a place of business in India, and if so, the
address of its principal office in India.

3. Provisions as to expert’s consent and allotment‐

A prospectus issued by a foreign company
for raising share capital shall not include a statement purporting to be an expert’s comment
if the same is not given, in writing, by the expert, or has withdrawn the same before delivery
of the prospectus for registration. An “expert” includes an engineer, a valuer, an accountant
or any other person whose profession gives authority to a statement made by him. [Section
604]

4. Registration of prospectus‐
A prospectus to be valid for a foreign company must be before its issue, circulation or
distribution be certified by the chairman and two other directors of the company as having
been approved by resolution of the managing body and delivered for registration to the
Registrar. It should state on its face that the same has been delivered for registration and it
is attached with any expert consent and any contract which is not reduced in writing as per
Part II of Schedule II. [Section 605]

5. Penalty and Civil Liability-

Section 606 mentioned below under the italics states the provisions regarding imposition
of penalty.
“Any person who is knowingly responsible‐

a) for the issue, circulation or distribution of prospectus; or

b) for the issue of a form of application for shares, debentures or Indian Depository
Receipts; in contravention of any of the provisions of sections 603, 604, 605 and 605A
shall be punishable with imprisonment for a term which may extend to six months or with
fine which may extend to fifty thousand rupees, or with both.”
Section 606 talks about the civil liability for mis‐statements in prospectus. It is to be noted

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 that provisions of section 62 are equally applicable with a mis‐statement in prospectus
offering an IDR by a foreign company.

AMERICAN DEPOSITORY RECEIPT 11 (ADR)

History of ADR:
• Before American depositary receipts were introduced in the 1920s, American investors
who wanted shares of a non-U.S. listed company could only do so on
international exchanges - an unrealistic option for the average person back then.
• ADRs were developed because of the complexities of buying shares in foreign
countries and the difficulties associated with trading at different prices and currency
values. J.P. Morgan’s predecessor, Guaranty Trust, pioneered the ADR concept. In
1927, it launched the first ADR, enabling U.S. investors to buy shares of famous British
retailer Selfridges and helping the luxury depart store to tap into global markets. The
ADR was listed on the New York Curb Exchange. 12
• A few years later, in 1931, the bank introduced the first sponsored ADR for the British
music company Electrical & Musical Industries, the eventual home of the Beatles.
Today, J.P. Morgan and BNY Mellon, another U.S. bank, continue to be actively
involved in the ADR markets. 13
Example of ADRs:
Between 1988 and 2018, German car manufacturer Volkswagen AG traded OTC in the U.S. as a
sponsored ADR under the ticker VLKAY. In August 2018, Volkswagen terminated its ADR
program. 14 One day after the termination, J.P. Morgan established an unsponsored ADR for
Volkswagen, trading under the ticker VWAGY. 15

12
https://jpmorganchaseco.gcs-web.com/static-files/b79add3a-c141-40c7-ae41-82d809ee1fe4
13
https://www.jpmorganchase.com/about/our-history
14
https://depositaryreceipts.citi.com/adr/guides/pgm_d.aspx?typeDisplay=A&pageId=16&subpageID=104&cusip=9
28662303
15
https://adr.com/drprofile/928662600

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Investors who held the old VLKAY ADRs had the option of cashing out, exchanging the ADRs
for actual shares of Volkswagen stock—trading on German exchanges—or exchanging them for
the new VWAGY ADRs.

Difference between owning shares and ADR:

ADRs are U.S. dollar-denominated certificates that trade on American stock exchanges and track
the price of a foreign company's domestic shares. ADRs represent the prices of those shares but
do not grant you ownership rights as common stock typically does.

Foreign Companies listing ADR 16:

Foreign companies often seek to have their shares traded on U.S. exchanges through ADRs to
obtain greater visibility in the international market, access to a larger pool of investors, and
coverage by more equity analysts. Companies that issue ADRs may also find it easier to raise
money in international markets when their ADRs are listed in U.S. markets.

Sponsored ADR vs. Unsponsored ADR 17:

In a sponsored ADR, the depositary bank works with the foreign company and their custodian
bank in their home country to register and issue the ADRs. An unsponsored ADR is issued by a
depositary bank without the involvement, participation, or even the consent of the foreign company
it represents ownership of. Unsponsored ADRs are usually issued by broker-dealers that own
common stock in a foreign company and trade over-the-counter. Sponsored ADRs are more
commonly found on exchanges.
Sponsored ADR 18:
For a sponsored ADR, the foreign company issuing shares to the public enters into an agreement
with a US depositary bank to sell its shares in US markets. The US bank is responsible for
recordkeeping, sale, and distribution of shares to the public, distribution of dividends, etc.,
Sponsored ADRs can be listed on the US stock exchanges.
Non-Sponsored ADR:

16
https://www.investor.gov/introduction-investing/investing-basics/glossary/american-depositary-receipts-adrs
17
chromeextension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.ivey.uwo.ca/faculty/ssapp/Teaching/EMBA/E
MBA_Background_ADR's.pdf
18
https://corporatefinanceinstitute.com/resources/equities/american-depositary-receipts/

22 | P a g e
A non-sponsored ADR is created by brokers/dealers without the cooperation of the foreign
company issuing the shares. Non-sponsored ADRs are traded in US over-the-counter markets
without requiring registration with the Securities and Exchange Commission (SEC).
Before 2008, any brokers and dealers trading in ADRs were required to submit a written
application before being allowed to trade in the US. The 2008 SEC amendment provided an
exemption to foreign issuers that met certain regulatory conditions. Non-sponsored ADRs only
traded on over-the-counter markets.

Levels of American Depositary Receipts 19:

ADRs are grouped into three levels depending on the extent of the foreign company’s access to
the US trading market.
1. Sponsored Level I:
Level I is the lowest level at which sponsored ADRs can be issued. It is the most common
level for foreign companies that do not qualify for other levels or that do not want their
securities listed on US exchanges. Level I ADRs are subject to the least reporting
requirements with the Securities and Exchange Commission, and they are only traded over
the counter.
The companies are not required to issue quarterly or annual reports like other publicly
traded companies. However, Level I issuers must have their stock listed on one or more
exchanges in the country of origin. Level I can be upgraded to Level II when the company
is ready to sell through US exchanges.
2. Sponsored Level II ADRs:
Level II ADRs have more requirements from the SEC than Level I, and the company gets
an opportunity to establish a higher trading presence on the US stock markets. The
company must file a registration statement with the SEC.
Also, the company must file Form-20-F in accordance with the GAAP or IFRS standards.
Form 20-F is the equivalent of Form-10-K, which is submitted by US publicly traded
companies. If the issuer fails to comply with these requirements, it may be delisted or
downgraded to Level I.

19
https://depositaryreceipts.citi.com/adr/common/linkpage.aspx?linkFormat=I&pageId=6&subpageid=169

23 | P a g e
 3. Sponsored Level III ADRs:
Level III is the highest and most prestigious level that a foreign company can sponsor. A
foreign company at this level can float a public offering of ADRs to raise capital from
American investors through US exchanges. Level III ADRs also attract stricter regulations
from the SEC.
The company must file Form F-1 (prospectus) and Form 20-F (annual reports) in
accordance with GAAP or IFRS standards. Any materials distributed to shareholders in the
issuer’s home country must be submitted to the SEC as Form 6-K.
Examples of foreign companies that have managed to enter this ADR level include
Vodafone, Petrobras, and China Information Technology.

Termination or Cancellation:
ADRs are subject to cancellation at the discretion of either the foreign issuer or the
depositary bank that created them. The termination results in the cancellation of all ADRs issued
and delisting from the US exchange markets where the foreign stock was trading. Before the
termination, the company must write to the owners of ADRs, giving them the option to swap their
ADR for foreign securities represented by the receipts.
If the owners take possession of the foreign securities, they can look for brokers who trade in that
specific foreign market. If the owner decides to hold onto their ADR certificates after the
termination, the depositary bank will continue holding onto the foreign securities and collect
dividends but will not sell more ADR securities.

Global Depository Receipts (GDR)

• A global depositary receipt 20 (GDR) is a negotiable financial instrument issued by a
depositary bank. It represents shares in a foreign company and trades on the local stock
exchanges in investors' countries. GDRs make it possible for a company (the issuer) to
access investors in capital markets beyond the borders of its own country.
• GDRs are commonly used by issuers to raise capital from international investors through
private placement or public stock offerings.

20
https://www.5paisa.com/stock-market-guide/stock-share-market/global-depository-receipts

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 • A global depositary receipt is very similar to an American depositary receipt (ADR) except
that an ADR only lists shares of a foreign company in U.S. markets.
• A global depositary receipt is a type of bank certificate that represents shares of stock in
an international company. The shares underlying the GDR remain on deposit with a
depositary bank or custodial institution.
• While shares of an international company trade as domestic shares in the country where
the company is located, global investors located elsewhere can invest in those shares
through GDRs.
• Using GDRs, companies can raise capital from investors in countries around the world.
GDRs can in theory be denominated in any currency, but are nearly always in U.S. dollars.
Since GDRs are negotiable certificates, they trade in multiple markets and can provide
arbitrage opportunities to investors.

GDR Characteristics:
GDRs are exchange-traded securities that represent ownership of shares in a foreign company,
where those actual shares are traded abroad.
Different GDRs may also have specific characteristics that differ from one to the next. These may
include:
• Number of shares: Each GDR represents a specific number of shares of the underlying
company. This amount can vary from one GDR to another, and it may be adjusted over
time to reflect changes in the underlying shares.
• Denomination: Although they can in theory use any currency, GDRs are nearly always
denominated in U.S. dollars. The Euro is the next most common currency. The currency
used for a GDR may impact its price and the risks associated with the investment, such as
currency risk, as the price of its shares overseas are priced in local currency.
• Sponsorship: GDRs are issued by depository banks, and the specific bank that sponsors a
GDR may vary from one GDR to another. Different banks may have different reputations,
financial strength, and other characteristics that could impact the risks and potential returns
of a GDR.

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 • Fees: GDRs may also vary in terms of the fees that are charged for issuing, trading, or
holding the GDRs. These fees can impact the overall cost and potential returns of an
investment in a GDR.

Trading GDRs 21:

• International companies issue GDRs to attract capital from foreign investors. GDRs trade
on the investors' local exchanges while offering exposure to an international marketplace.
A custodian/depositary bank has possession of the GDRs underlying shares while trades
take place, ensuring a level of protection and facilitating participation for all involved.
• Brokers who represent buyers manage the purchase and sale of GDRs. Generally, the
brokers are from the home country and operate within the foreign market. The actual
purchase of the assets is multi-staged, involving a broker in the investor's country, a broker
located within the market of the international company, a depositary bank representing the
buyer, and a custodian bank.
• Brokers can also sell GDRs on an investor's behalf. An investor can sell them as-is on the
proper exchanges, or the investor can convert them into regular stock for the company.
Additionally, they can be canceled and returned to the issuing company.
• Traders dealing in GDRs often compare the, for example, U.S. dollar price of the GDR
with the U.S. dollar equivalent price of the shares trading on the international company's
domestic exchange. They'll typically buy the less expensive security and sell the other.
Eventually, this arbitrage trading activity causes the underlying shares and the GDRs to
reach parity.

Advantages of GDRs 22:

• GDRs help international companies reach a broader, more diverse audience of potential
investors.
• They can potentially increase share liquidity.
• Companies can conduct an efficient and cost-effective private offering.

21
https://www.adr.db.com/drwebrebrand/about-drs/gdrs/types-gdr
22
chromeextension://efaidnbmnnnibpcajpcglclefindmkaj/https://depositaryreceipts.citi.com/adr/common/file.aspx?id
f=1525

26 | P a g e
 • Shares listed on major global exchanges can increase the status or legitimacy of an
otherwise unknown foreign company.
• For investors, GDRs provide the opportunity to diversify portfolios internationally.
• GDRs are more convenient and less expensive than opening foreign brokerage accounts
and purchasing stocks in foreign markets.
• Investors don't have to pay cross-border custody or safekeeping charges.
• GDRs trade, clear, and settle according to the exchange and its country's domestic
processes and procedures.
• U.S. holders of GDRs realize any dividends and capital gains in U.S. dollars.

Disadvantages of GDR:
• GDRs may have significant administrative fees.
• Dividend payments are net of currency conversion expenses and foreign taxes.
• The depositary bank automatically withholds the amount necessary to cover expenses and
foreign taxes.
• U.S. investors may need to seek a credit from the Internal Revenue Service (IRS) or a
refund from the foreign government's taxing authority to avoid double taxation on capital
gains realized.
• GDRs have the potential to have low liquidity, making them difficult to sell.
• In addition to liquidity risk, they can have currency risk and political risk.
• This means that the value of GDR could fluctuate according to actual events in the foreign
county, such as recession, financial collapse, or political upheaval.

Conclusion:
Long back the great Chinese philosopher, Lao Tse Tung said, “Even a march of civilization starts
with a single step”. The IDR issue is just a little first step towards a new era of Indian capital
market. But it is clear that at this point is the fact that if India has to be an economic superpower
then it will certainly have to integrate with the world of ADR and GDR. An IDR issue is just an
example of the confidence shown by world in our economy. For full faith to be proved IDR must
shine the amidst other Depository receipts.

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References:
1. https://www.ivey.uwo.ca/faculty/ssapp/Teaching/EMBA/EMBA_Background_ADR's.pdf

2. https://egyankosh.ac.in/bitstream/123456789/6434/1/Unit-9.pdf

3. https://vinodkothari.com/wp-content/uploads/2020/04/Article-on-Indian-Depository-
Receipt.pdf

4. https://www.sebi.gov.in/sebi_data/commondocs/idr_h.html

5. chromeextension://efaidnbmnnnibpcajpcglclefindmkaj/https://depositaryreceipts.citi.com/
adr/common/file.aspx?idf=1525

6. https://www.adr.db.com/drwebrebrand/about-drs/gdrs/types-gdr

7. https://www.primedatabase.com/article/2024/Article-Anay_Khare.pdf

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