New rules treat GDRs/ADRs on par with shares

Do Global Depository Receipts (GDRs) and American Depositary Receipts (ADRs) currently have voting rights?
The GDRs and ADRs in themselves do not have voting rights, but the underlying equity shares do. These shares are held by a depository, which then issues the corresponding receipts (GDRs/ADRs) to investors looking to buy such instruments. So it is the depository that has the voting rights. Whether the holders of the GDRs/ADRs can vote or not depends on the depository agreement between the company issuing the GDRs/ADRs and the depository. During the initial years when GDRs and ADRs came into vogue, the agreement mandated depositories to vote on behalf of the management. But later, the depository agreements were changed so as to allow the GDR/ADR holders to instruct the depository to vote on their behalf.


How do ADRs/GDRs work?
ADRs/GDRs are issued by companies looking to raise funds overseas. These instruments may represent one, multiple or a fraction of the underlying shares. For instance, if an Indian company wants to issue ADRs, it will deliver the corresponding number of shares to the US depository bank. The depository will then issue receipts to investors who have subscribed to the issue. Depository receipts are transferable instruments, so they can be freely traded on the exchange on which they are listed. They are also fungible, which means the holder of ADRs can instruct the depository to convert them into underlying shares and offload them in the local market (in this case India).

What did Sebi say about GDRs/ADRs on Tuesday?
Till now, purchases made through GDRs/ADRs did not trigger an open offer by the acquirer even if the 15% threshold was crossed so long as the depository receipts had not been converted into underlying shares. But on Tuesday, the regulator amended this rule. Anyone now holding ADRs/GDRs with voting rights will have to make an open offer to minority shareholders if his holding touches the 15% limit.

Why did the regulator have to make this amendment?
Securities lawyers and merchant bankers say the Takeover Regulations relating to ADRs/GDRs were drafted at a time when the depositories always voted on behalf of the management. Now that depository receipt holders have the right to vote, it makes little sense to keep ADR/GDR holdings outside the purview of the Takeover Regulations.

How does this amendment affect the Bharti-MTN deal?
Bharti’s proposed takeover of MTN involved issuing GDRs to the South African telecom firm and its shareholders, which would add up to 27% of Bharti’s equity base. In an informal guidance to Bharti in July, the regulator had said that purchases through the GDR route would not trigger an open offer unless the GDRs were converted into shares. But under the new rule, MTN will have to make an open offer for an additional 20% in Bharti. This would make the deal expensive for MTN and also for Bharti, if it wants to get around the new rule.

Can Bharti still go ahead with its deal with MTN?
It can. For instance, the depository agreement can stipulate that the GDRs will not have any voting rights. This is the most inexpensive way of getting around the new rule. But the key question here is whether MTN shareholders will agree to such an arrangement. The other option for Bharti is to cut down the issuance of GDRs to below 15% and pay more cash to MTN. But that could increase the cost significantly for Bharti.


http://economictimes.indiatimes.com/Markets/Analysis/ET-in-the-classroom-New-rules-treat-GDRs/ADRs-on-par-with-shares/articleshow/5049080.cms