How do Indian Companies List on Foreign Exchanges?

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.

American Depository Receipts (ADRs) And How Do They Work?

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:

• Sponsored ADRs: Existence via an agreement between a non-American company and an American financial institute/ bank
• Unsponsored ADRs: Existence without the involvement of the non-American company

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).