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American Depositary Receipt (ADR)
A sponsored American Depositary Receipt (ADR) is a mechanism to convert the existing equity shares listed in
India, into ADR for trading in US market. This mechanism allows the shareholders in India to convert and sell
their equity shares in US market and realise the proceeds net of issue expenses. In December 2002, RBI allowed
Indian companies to offer their domestic investors, an option of converting their domestic share into ADRs that is
listed on the LSE, LxSE, and NYSE etc.
Three factors are important to a Sponsored ADR mainly: -
1. ADRs do not lead to any additional issue of equity shares by the company. Number of available shares for
trading in Indian market comes down and of ADR enlarges in total proportion. A sponsored ADR, infuses
liquidity in overseas market.
2. No money is accrued to the company. The company does not issue new shares and tend to benefit
notionally as the base is extended in the hand of large institutional investors.
3. This reduces arbitrage opportunity. The offer gives Indian investors a chance to book premium in the
international market, as there might be a high demand of Indian ADRs.
Pursuant to the RBI regulations, an issuer in India may sponsor the issue of ADRs through an overseas
depositary against underlying equity shares accepted from holders in India. The guidelines lay the conditions,
such as: -
Prior approval of Foreign Investment Promotion Board (FIPB) is required for a sponsored ADR offering;
ii. ADRs is offered at a price determined by the lead manager of the Offering;
iii. All equity holders may participate;
Issuer should obtain shareholders᪽ approval; and
Proceeds should be repatriated to India, within one month of the closure of the issue.
Such issues of ADR/GDRs come under the purview of SEBI takeover code if these are cancelled and