ABSTRACT - American Depository Receipts by Indian Company

University of petroleum & energy studies College of legal studies Dehradun

ABSTRACT : American Depository Receipts by ndian Company

Submitted to !

Submitted By"

Shruti Reddy

#rashant Singh

Asstt$ #rofessor 'ons$( )th sem$

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Roll no$

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American Depository Receipts by Indian Company Financial markets connect capital from investors to the most productive applications in firms. Firms seek the lowest possible cost of capital for financing projects. When low cost capital is available, a larger set of projects are financially viable, and greater investment takes place. Equity capital from global investors is likely to be cheaper when compared with domestic sources, as global investors are internationally diversified. There are two alternative mechanisms through which foreign investors can connect with firms in ndia. The first mechanism involves direct participation by foreign investors in the ndian financial markets. The second mechanism involves participation by ndian firms in overseas financial markets. Each of these two methods has strengths and weaknesses. The local market is likely to be more liquid and better at capturing information about the firm raising capital. The overseas market is easier to access for many overseas investors. !n !merican depositary receipt "!#$% is a simple way for investors to invest in companies whose shares are listed abroad. The !#$ is essentially a certificate issued by a  bank that gives the owner rights over a foreign share. t can be listed on a stock e&change and  bought and sold just like a normal share. The holder of an !#$ is entitled to all benefits such as dividends and rights issues from the underlying shares. They are sometimes, but not always, able to vote. !#$'s represent ownership of a non()* company's shares to be traded in the !merican market. The !#$'s thus enable the )* investors to buy shares of foreign companies without having to undertake cross border transactions. The price of !#$'s is in )* #ollars. From the view point of ).*. investors, the !#$'s are like shares of )* based companies. Each !#$ can represent one share or fraction of a share or multiple shares of the company concerned. The price of an !#$ moves closely with the share price of a company in its home market, adjusted for the ration in which !#$'s have been issued against the company's shares. The !#$ system facilitates the raising of capital by ndian companies from )* investors. n an open economy, real sector firms that compete internationally require inputs that have international characteristics regarding price and quality. n a competitive market, if different firms face different input costs, the firm with higher input cost is at a disadvantage. For ndian firms to be globally competitive, it is essential that they have access to capital as well as quality financial services at the lowest cost. Therefore, there is no reason to deny any domestic firm access to international capital markets.