ADR/GDR ARBITRAGE


Several Indian companies actively trade on the London and New York Stock Exchanges and due to the time differences, market news, sentiments etc. sometimes the prices of the DR(Depository receipt) trade at discounts or premiums to the underlying stock. This presents a knowledgeable fund manager an arbitrage opportunity, where he buys the DR abroad and sells the same stock in India at a higher price (the difference being the profit).


Same DRs trade during India market hours offering a live arbitrage opportunity. As there is very little risk in such trades the gap between the DR and underlying stock is minimal. DRs which trades in the US markets offer better gaps, but there is the overnight risk to be factored in. Hence the fund manager must take into consideration the local market conditions before buying the stock in the US, as he must be confident of the selling off the stock the next morning in India at the profitable gap.


Once the stock is bought, arrangements are made to deliver the stock in India, which involves several procedures (stock is borrowed at times for this). Once the stock is delivered in India the proceeds are allowed to be repatriated and the process repeated.


There are some stocks which are also allowed to be bought in India and converted into the DR forms, which is attractive if the DR is trading at a premium to the Indian stock price.


The Process
1. Buy DR


2. Sell local stock in India in cash market or futures market.


3. Convert shares from DR to local.


4. Deliver shares to stock exchange in India.


5. Deposit proceeds in Indian bank account.


6. Repatriate funds.


7. Repeat process.


The Costs


1. Foreign brokerage.


2. Local brokerage.


3. Custodian charge for conversion (local and global).


4. Back charges for transfer.


5. Fund manager charge.


WHAT IS ADR/GDR


What is American Depository Receipt (ADR) and Global Depository Receipt (GDR)?


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This article explains what ADRs and GDRs are, and how they can be used by Non Resident Indians (NRIs) and non-Indians for making investments in India.


India is hot these days – all major brokerages are of the opinion that India has a great long term potential, and that investors in India would reap handsome benefits in the next 10 years.


With the current correction in the Indian stock market, the valuations have become even better. And the logic of investing in Indian equity market has become even more compelling.


This is great for people living in India – they can invest in various mutual funds (MFs), or can choose some great companies and invest in those. (Confused if you should invest in stocks directly or through mutual funds? Please read “Direct investment in Stocks versus Mutual Funds (MFs)?”)


But what about Non Resident Indians (NRIs) and foreign nationals? Considering the many restrictions on NRIs and foreign nationals investing in India, how can they benefit from the potential that India offers?


There are some very good proxies to investing directly in India – and ADRs and GDRs are a great option.


What is an ADR / GDR?


ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt. Let’s understand these better.


Every publicly traded company issues shares – and these shares are listed and traded on various stock exchanges. Thus, companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc.


These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation).


But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly.


But many good companies get listed on these stock exchanges indirectly – using ADRs and GDRs.


This is what happens: The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4).


These receipts are then sold to the people of this foreign country (and anyone who is allowed to buy shares in that country). These receipts are listed on the stock exchanges. They behave exactly like regular stocks – their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company.


These receipts, which are traded like ordinary stocks, are called Depository Receipts. Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares – that is, it stores the shares on behalf of the receipt holders.


What is the difference between ADR and GDR?


Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded.


If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR.


If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR.


How can you use an ADR / GDR?


ADRs and GDRs are not for investors in India – they can invest directly in the shares of various Indian companies.


But the ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals wanting to invest in India. By buying these, they can invest directly in Indian companies without going through the hassle of understanding the rules and working of the Indian financial market – since ADRs and GDRs are traded like any other stock, NRIs and foreigners can buy these using their regular equity trading accounts!


Which Indian companies have ADRs and / or GDRs?


Some of the best Indian companies have issued ADRs and / or GDRs. Below is a partial list.


Company ADR GDR


Bajaj Auto No Yes


Dr. Reddys Yes Yes


HDFC Bank Yes Yes


Hindalco No Yes


ICICI Bank Yes Yes


Infosys Technologies Yes Yes


ITC No Yes


L&T No Yes


MTNL Yes Yes


Patni Computers Yes No


Ranbaxy Laboratories No Yes


Tata Motors Yes No


State Bank of India No Yes


VSNL Yes Yes


WIPRO Yes Yes


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Non-Resident External (NRE) & Non-Resident Ordinary (NRO) Accounts for NRIs


Saving Income Tax – Understanding Section 80C Deductions


Dividend Yield - A better alternative to FDs


Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage


Initial Public Offering (IPO) Modernization – Benefits for small investors


Real Estate Investment


Impact of stock market crash on insurance / ULIP holders


Income Tax (IT) Jargon – Financial Year (FY), Assessment Year (AY) and Previous Year (PY)


What is Direct Market Access (DMA)?


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