According to a few media reports during mid-November 2021, we learnt that Coforge, a mid-cap IT firm in India has filed papers in the US Securities Exchange Commission for an IPO in the US via an ADR or American Depository Receipt. This is according to the Coforge ADR offer filing quoted by many media reports.
ADRs (discussed in detail further) are methods be which Indian companies can sell their shares on US exchanges. Many companies including ICICI Bank, Tata Motors and a few others have ADRs.
According to NIIT Coforge news, Barings PE Asia, a promoter of the company, will sell a part of its stake, according to a media report.
Barings PE Asia holds around 50.2% stake in Coforge.
The company wants to create an official public market space for its American Depository Shares (ADSs) according to Coforge ADR offer filing. ADSs are US dollar denominated shares of foreign companies listed on the US exchange.
To boost the Indian economy, the Central government has allowed direct listing of Indian companies in foreign exchanges. However, before the listing happens, a few things have to be taken care of, like the amendment of Section 23 of the Companies Act 2013. Moreover, the companies need to meet specific criteria to get directly enlisted on foreign exchanges—average profit in the last three years, paid-up share capital, the value of the company’s tangible and intangible assets, etc.
As this is still a work in progress, Indian companies can enter the overseas capital market via ADRs and GDRs. You must be wondering what are ADRs and GDRs after reading the NIIT Coforge news. The full forms of GDR and ADR are Global Depository Receipts and American Depository Receipts, respectively.
Indian companies wishing to raise money from the American market can enlist their shares on American Stock Exchange. Since an Indian company cannot directly issue its shares in a foreign stock exchange, ADR is a means by which Indian companies draw American investors and their capital. ADRs enable trading non-American shares in American exchanges.
Two types of ADRs are:
These are further sub-categorized as Type I, II, and II.
How Do ADRs Work?
The company provides an American financial institution with its shares. The bank holds the shares as inventory and acknowledges them through a certificate called ADR. This represents the company’s share in the American stock market and is listed in NASDAQ or New York Stock Exchange and traded over-the-counter. After that, shares are valued and transacted in dollars. Each ADR comprises a specific number of shares as deemed fit by the depository bank—One ADR could mean one share, multiple shares, or a fraction of a share. If an investor in America purchases shares of an ADR-listed Indian company, he buys the ADR issued to that company against the shares in question. Then, the ADR is converted into the same number of shares. The investor obtains the dividend and capital gain in American dollars.
The company has to provide the bank with detailed financial information for the benefit of American investors. Also, the value of the company’s shares in the Indian market is closely monitored because of the buying/ selling of the same shares simultaneously in different markets (arbitrage).
It’s only through GDR that an Indian company can make its shares available in different global exchanges. It is a negotiable certificate that helps Indian companies raise funds by trading their shares outside India. Its two types are:
For instance, an Indian company can agree with a financial institute/bank of London. The custodian bank holds the company’s shares against GDR issuance. The bank, in turn, enrols the stocks of the company in London Stock Exchange. The bank facilitates the entire transaction. One GDR can represent one share or multiple shares or a fraction of a share. This is generally decided by the depository bank depending on what will appeal to the investors.
The value of the company’s shares in the Indian market is closely monitored because of arbitrage. GDR transactions in a global market have lower costs than other similar mechanisms.
In a direct listing, a domestic company can enlist itself with the stock exchanges of other countries without an intermediary. Unlike ADRs and GDRs, the Indian company can directly offer their shares in foreign markets instead of giving them to a foreign depository bank.
Direct listing excludes intermediaries, decreases the overall transaction cost, and increases transparency. However, a direct overseas listing of Indian companies hasn’t yet been implemented.
List of Indian companies listed overseas (ADR):
Some of the foreign listing Indian companies (GDRs):
So, these are some of the famous Indian companies listed outside India.
When Indian companies are listed in foreign exchanges, it gives rise to an alternate source of capital, better valuation, a diverse conglomeration of investors, a broader investor base, international brand recognition, foreign currency generation, and more.