Study of global depository receipts in the Indian context

Abstract

The current report on GDRs and ADRs in the Indian context introduces the reader to the conceptof Depository Receipts, the way they function, and also briefly covers different listingrequirements for different exchanges internationally. The regulations imposed by SEBI on thecompanies in issuing GDRs, the various options available for the subscribers to invest in theseinstruments are also elaborated.We have explained precisely the pricing of GDRs based on a proportionate estimate of the stockprice in the Indian bourses. The advantages and scope of two-way-fungibility scheme introducedby the regulator in the Indian context, its key features & benefits have been elucidated clearly.The recent discovery of GDR scam has been widely studied and analyzed covering each andevery player involved and the mechanism used by these parties to exploit the loop holes in thesystem, inflate the stock prices significantly, and finally dump the stocks on retail investors. Twopossible mechanisms behind the GDR scam have been explained, one being the Pump and Dumpscenario wherein the stock prices are artificially inflated and dumped on the retail investors toachieve significant capital gains. The second possible scenario would be the money launderingcase, wherein the foreign currency (mostly black money) is brought into India using the GDRroute.Seven companies are involved in issuing fraudulent GDRs in the Luxemburg market where a fewsub accounts have fully subscribed to these otherwise insignificant GDR issues. Apart from thecompanies issuing GDRs, 5 FIIs and 5 Sub-Accounts linked to these FIIs in India which wereclosely linked with the scam have been identified and barred from trading until further notice.The mechanism in which the entire scam was executed, interlinks between these players, and therole of each player is explained clearly using a pictorial representation.We have conducted regression analysis to determine the correlation between these stocks andthe exchanges, and find any abnormal earnings growth post the GDR issue. To substantiate theresults obtained, we have performed regression on 4 other genuine companies issuing GDRs inthe same exchange and other exchanges as well. Conforming to our expectations, while thecumulative abnormal returns in the scam hit companies are as high as 90%, those for normalGDRs are close to 0.