This article has been written by Mr. HemaCouponsnt Kumar, a 2nd year LL.B student from Faculty Of Law, Delhi University.
Introduction:
Global Depository Receipts (GDRs) are negotiable instruments issued by depository banks outside of the United States. They allow investors to invest in foreign companies without having to deal with foreign stock exchanges or currencies. GDRs are also used by companies to raise capital in international markets. The GDR market has grown rapidly over the past few years, with the issuance of GDRs becoming an increasingly popular means of raising capital.
Types of GDRs:
There are two types of GDRs: Sponsored GDRs and Unsponsored GDRs. Sponsored GDRs are issued by companies with the help of depository banks. In this case, the issuing company appoints a depository bank to issue GDRs on its behalf. The depository bank holds the underlying shares of the issuing company and issues GDRs to investors. Unsponsored GDRs are issued by depository banks without the involvement of the issuing company. In this case, the depository bank buys shares of the issuing company on the open market and issues GDRs to investors.
Recent Judgements:
In recent years, there have been several legal cases related to GDRs. In 2014, the Securities and Exchange Board of India (SEBI) barred 12 entities from trading in the Indian stock market for manipulating the GDR market. The entities were accused of using GDRs to create a false demand for shares of Indian companies and then selling their own shares at inflated prices. In 2017, the Hong Kong Securities and Futures Commission fined Citigroup Global Markets Asia Limited HKD 57 million for failing to carry out proper due diligence in relation to the issuance of GDRs. The GDRs in question were issued by a Chinese company that was later found to have engaged in fraudulent activities.
Laws related to GDRs:
GDRs are subject to the laws of the country in which they are issued. In the United States, GDRs are subject to the Securities Act of 1933 and the Securities Exchange Act of 1934. In the European Union, GDRs are subject to the Prospectus Regulation and the Market Abuse Regulation. In India, GDRs are subject to the Foreign Exchange Management Act and the Companies Act. These laws govern the issuance, trading, and disclosure requirements for GDRs.
Case laws related to GDRs:
One of the most well-known cases related to GDRs is the Satyam Computer Services Ltd. case. In 2009, Satyam Computer Services Ltd., a leading Indian IT company, was found to have engaged in accounting fraud. The company had inflated its revenues and profits over a period of several years. As a result, the company’s stock price had risen significantly, and it had issued GDRs to investors. The fraud was uncovered when the company’s founder, Ramalinga Raju, confessed to the fraud. The case resulted in a number of legal proceedings, including criminal charges against Raju and several other executives.
Another notable case related to GDRs is the Vodafone tax case. In 2007, Vodafone acquired a 67% stake in Hutchison Essar, an Indian telecommunications company. The acquisition was made through a holding company based in the Netherlands. The Indian tax authorities claimed that Vodafone was liable to pay taxes on the transaction, as the underlying assets were located in India. Vodafone argued that the transaction was between two foreign companies and did not involve any Indian assets. The case went to the Supreme Court of India, which ruled in favor of Vodafone in 2012.
Examples of GDRs:
Alibaba Group Holding Ltd: In 2014, Alibaba issued $25 billion worth of GDRs on the New York Stock Exchange (NYSE), making it the largest IPO in history. The GDRs were issued by Citibank, Deutsche Bank, and JP Morgan Chase.
Tata Motors Ltd: In 2016, Tata Motors issued $750 million worth of GDRs on the Luxembourg Stock Exchange. The GDRs were issued by Deutsche Bank.
Samsung Electronics Co. Ltd: In 2017, Samsung issued $2 billion worth of GDRs on the London Stock Exchange (LSE). The GDRs were issued by Bank of America Merrill Lynch, Citigroup, and JPMorgan Chase.
Infosys Ltd: In 2020, Infosys issued $1.3 billion worth of GDRs on the Luxembourg Stock Exchange. The GDRs were issued by Citigroup, Deutsche Bank, and JP Morgan Chase.
Case laws related to GDRs:
Satyam Computer Services Ltd. case: In 2009, Satyam Computer Services Ltd., a leading Indian IT company, was found to have engaged in accounting fraud. The company had inflated its revenues and profits over a period of several years. As a result, the company’s stock price had risen significantly, and it had issued GDRs to investors. The fraud was uncovered when the company’s founder, Ramalinga Raju, confessed to the fraud. The case resulted in a number of legal proceedings, including criminal charges against Raju and several other executives.
Vodafone tax case: In 2007, Vodafone acquired a 67% stake in Hutchison Essar, an Indian telecommunications company. The acquisition was made through a holding company based in the Netherlands. The Indian tax authorities claimed that Vodafone was liable to pay taxes on the transaction, as the underlying assets were located in India. Vodafone argued that the transaction was between two foreign companies and did not involve any Indian assets. The case went to the Supreme Court of India, which ruled in favor of Vodafone in 2012.
Citigroup Global Markets Asia Limited case: In 2017, the Hong Kong Securities and Futures Commission fined Citigroup Global Markets Asia Limited HKD 57 million for failing to carry out proper due diligence in relation to the issuance of GDRs. The GDRs in question were issued by a Chinese company that was later found to have engaged in fraudulent activities.
Securities and Exchange Board of India (SEBI) case: In 2014, SEBI barred 12 entities from trading in the Indian stock market for manipulating the GDR market. The entities were accused of using GDRs to create a false demand for shares of Indian companies and then selling their own shares at inflated prices.
Solutia Inc. case: In 2003, Solutia Inc., a US-based chemical company, filed for bankruptcy. The company had issued GDRs, and the bankruptcy raised questions about how GDR holders would be treated in the bankruptcy proceedings. The case was eventually settled, with GDR holders receiving a portion of the proceeds from the sale of the company’s assets.
Conclusion:
GDRs have become an increasingly popular means of raising capital for companies around the world. However, as with any financial instrument, there are risks involved. Companies must comply with the laws and regulations governing the issuance of GDRs, and investors must carefully evaluate the risks and potential returns before investing in GDRs. The legal cases related to GDRs serve as a reminder that there are legal and regulatory risks associated with investing in GDRs.
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