Goa Conference Highlights Rapid Growth of Indian DR Issuance

Financially sophisticated corporations around the globe are increasingly using depositary receipts (DRs) to cross their domestic borders and tap into the huge capital bases available in foreign markets. Fueling one of the world's fastest-growing economies, with an annual growth rate of 8% over the

Indian companies-which are aggressively making cross-border acquisitions and gaining market share in international industries from pharmaceuticals to technology-continue to play a leading role in the expanding global DR market. These companies led the world in new program establishment in 2005 while capturing nearly 30% of the global market during the first 11 months of 2006 with 40 new programs, said Marianne Erlandsen, a managing director at The Bank of New York in New York City.

Erlandsen was speaking at the bank's 1st Annual DRIC-India, held in the resort town of Arossim Beach in Goa. Christianity and Hinduism have existed side by side in this small Indian state, which lies along the Arabian Sea and is a blend of Indian and Portuguese cultures. With its beautiful beaches and the widespread use of English, the state has been a popular tourist destination for international and domestic visitors for decades.

Held from November 16 to 18, the conference attracted more than 60 corporate clients that have used The Bank of New York's expertise to list their depositary receipts in markets from New York to London to Asia. The speakers included consultants, representatives of stock exchanges, Bank of New York officials and a representative of the Indian finance ministry.

American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs) play an important role in today's increasingly competitive global marketplace. They are negotiable certificates that represent the ownership of shares in a corporation from a country outside the market where the certificate is trading. Usually quoted and traded in US dollars, DRs are governed by the trading and settlement procedures of the market where they trade.

It's not only Indian companies that are increasingly tapping into this expanding market, which is at an all-time high. Nearly $2 trillion of DRs were expected to trade on markets around the globe in 2006, up 50% from 2005. Moreover, trading in GDRs (as reported by the London Stock Exchange's International Order book) was projected to soar by 150% in 2006, said Erlandsen. She expected about 150 new programs around the globe to raise about $40 billion in 2006 as companies from emerging-market countries play a significant role.

Erlandsen expects the trend to continue as it fills the appetite of investors intent on searching for better returns and more-diversified investments. "The classic reasons for the popularity of depositary receipts among investors are the ease of use, cost-efficiencies and easy access to diversification and internationalization," she said. "The changing balance of world economies will play a role, as well, as we look for future trends. Markets like India, Brazil and China will increase in relative importance, and investors will follow those trends."

The Bank of New York plays a significant role in the growth of this market and acts as depositary for 64%, or more than 1250 sponsored DR programs that represent issues from 60 countries. "As our business grows, we are expanding and educating our staff in an effort to extend our leadership position," said Erlandsen. "We continue to share and clarify market developments and illustrate to DR issuers, investors and brokers that there is a substantial difference among depositary banks."

A.M. Bajaj, director of external markets in the capital markets division of the Indian Ministry of Finance, said he views the growth in the DR market as an example of how global investors increasingly disregard geographic and political boundaries when seeking the highest rates of return on their investments.

Indian companies are successfully tapping into this trend. As broad-based government reforms started opening India's economy in the early 1990s, Indian companies learned to compete and prosper both at home and abroad. With their ambitious leaders, low costs, appealing products and services, and innovative technology, Indian companies are successfully going global to create competitive advantages and shareholder value. The use of DRs are one way that Indian companies are raising the capital they need as they strengthen the value of their companies in the eyes of domestic and international investors.

The giant Indian conglomerate Reliance Industries, for example, opened India's DR market 14 years ago in 1992. The trend continues with the recent issues of Patni Computer Systems in the United States, Cipla in Europe and MAN Industries (India) on the Asian continent.

Erlandsen believes the trend will continue as Indian companies with international businesses and corporate profiles to match seek a well-diversified, broad investor base of both domestic and international investors to support their future growth. "India has been such a success story in recent years, and we believe this trend will continue," she added. "We expect Indian companies will continue to use DRs successfully as part of their financial strategies."

Bajaj said most Indian companies are issuing ADRs and GDRs under less stringent routes, such as the Rule 144A market in the United States. This is a restricted market that is not open to the public but used by so-called qualified institutional buyers, also known as QIBs. He added that this type of DR program does not require compliance with the US Generally Accepted Accounting Principles (GAAP) and US securities and Exchange Commission disclosure requirements that usually accompany a US listing.

Cipla, the giant Indian pharmaceutical and chemical manufacturer based in Mumbai, raised $170 million when it listed its shares as GDRs on the London Stock Exchange in April of last year. Ajay Luharuka, the company's head treasurer, told the conference participants that his company chose the GDR route because of the quick timeframe of two to three months, the absence of restrictions on the use of funds, and access to long-term investors. Other reasons behind its decision to head to Europe included the low cost and the fact that Cipla didn't have to change its accounting methods to issue depositary receipts in the London market.

The accounting standards that a corporation must follow when submitting its financial information to an exchange is a significant factor that comes into play as corporate financial executives decide where to list their shares. Indian GAAP are acceptable on certain stock exchanges, such as the Euro-MTN (medium-term note) market or the Singapore Exchange Securities Trading, notes Sanjay Hegde, executive director of PricewaterhouseCoopers in India. But International Financial Reporting Standards (IFRS) or other GAAP Enancial statements are required on many other stock exchanges. For example, the US GAAP must be met when listing on the New York Stock Exchange or NASDAQ, he added.

Despite its size and liquidity, the US capital markets have become less attractive to many foreign companies looking to raise funds overseas in the past several years. Increasingly stringent US accounting rules and new financial reporting requirements laid out by the country's 2002 Sarbanes-Oxley Act have made listing in the US a costly and time-consuming venture. section 404, for example-which forces companies to monitor the internal controls they have in place to ensure their financial reporting is accurate and requires outside auditors to vouch for these controls-can cost a mid-size company several million dollars.

Passed after the corporate scandals that rocked the United States during the early part of this decade, the Sarbanes-Oxley legislation aims to curb corporate corruption in public companies. James Ogilvy-Stuart, head of Asia-Pacific for Nasdaq in Hong Kong, told the conference participants that the legislation had pushed all public corporations listing in the US toward greater transparency in their corporate governance practices. "It's really not the evil monster it's thought to be. It was put together with the best sentiments in mind and facilitates good governance and control. It may be costly upfront, but the pain is often mitigated by the increase in market valuation," he said.

Peter Ferraro, a partner at PricewaterhouseCoopers' Global Capital Markets Group who is based in Japan, said that the benefits of issuing ADRs in the US include increased liquidity and valuation along with access to the giant US capital markets. "ADRs give a corporation access to the largest debt and equity markets to meet funding requirements readily," he added.

Ed Bradley, a partner at the global law firm Clifford Chance, said the most likely non-US destination for an Indian corporation ready to list their GDRs would be the London Stock Exchange's main market; the LSE Professional securities Market, created in July 2005 to coincide with the introduction of the Financial Services Authority's new listing rules; and/or the Luxembourg Stock Exchange's Euro MTF market.

But no matter what foreign market they select, chief financial executives can add ongoing value to their companies by issuing depositary receipts. "DRs have a positive impact on liquidity," said Rory Knight, chairman of Oxford Metrica, an independent strategic advisory firm based in the United Kingdom. "And the improved transparency and governance they require adds value to the company."

Hugh Sandeman, head of business development for India at the London Stock Exchange, added that since corporations are accessing a broad investor base when they issue DRs, they must meet the up-to-date disclosure and governance standards that mesh with the requirements of major global institutions. "When companies access the global institutional investor base through the London Stock Exchange or other major international listing locations, they raise their game to meet what investors expect," he said.