Impact of ADR/GDR on performance of Indian Corporations

International Corporate Finance

By Group 10
Shaurya Anand 11P047
Hemant Chawla 11P079
Ishan Agrawal 11P081 Narsinha Jawalgaonker 11P082

Table of Contents 1. Introduction 3 2. Regulatory Framework 3 3. Why should there be any impact on liquidity or volatility 4 4. Analysis 5 5.Impact on Liquidity 10 Conclusion: 13 References 14

1. Introduction

Increasing globalization in the last decade has made Indian financial markets more integrated with the rest of the world. As a result, many Indian companies have gone for raising funds in foreign capital markets by way of issuing ADRs and GDRs.
Though cross listing is viewed positively by many corporations, many researchers have shown that changes in liquidity and volatility may affect quality negatively in the domestic markets.
Since companies from emerging markets go for raising funds from foreign liquid markets, some policymakers fear that if allowed unrestricted, this may impact the development of local equity markets and hence prove disastrous for emerging markets. Existing studies show that effect of foreign listing depends on factors specific to firms, market and country. Indian GDRs trade on European exchanges and ADRs trade on US exchanges. Also, since US requires higher quality disclosures than Europe, cost of listing in US markets is higher.
2. Regulatory Framework

As part of its economic liberalization policy in 1992, Indian government allowed Indian companies to raise money from foreign capital markets in the form of DRs. These DRs can be denominated in any currency and can be listed on any foreign exchange. Recently, government has also allowed two-way fungibility of DRs. Earlier only one way fungibility was allowed , that is, investors owning DRs were allowed to convert them into underlying Indian shares with a